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Chapter 15 Questions

Q1. “Working Capital Management” refers to the management of _____? Q2. The Instructor said the challenges in managing Working Capital include _____ (i.e., what are the general goals in managing Working Capital)?

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Chapter 15 Questions

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  1. Q1. “Working Capital Management” refers to the management of _____? Q2. The Instructor said the challenges in managing Working Capital include _____ (i.e., what are the general goals in managing Working Capital)? Q3. What are the three (3) Current Asset Management Policies described in the textbook and what do they mean? Chapter 15 Questions

  2. Q1. “Working Capital Management” refers to the management of _____? A1. Current Assets: Cash, Accounts Receivable, Inventories, Prepaid Expenses and Current Liabilities: Accounts Payable, Short-Term Notes Payable, Accued Expenses, Current Maturities of Long-Term Debt. Q2. The Instructor said the challenges in managing Working Capital include _____ (i.e., what are the general goals in managing Working Capital)? Q3. What are the three (3) Current Asset Management Policies described in the textbook and what do they mean? Chapter 15 Questions

  3. Q1. “Working Capital Management” refers to the management of _____? A1. Current Assets: Cash, Accounts Receivable, Inventories, Prepaid Expenses and Current Liabilities: Accounts Payable, Short-Term Notes Payable, Accued Expenses, Current Maturities of Long-Term Debt. Q2. The Instructor said the challenges in managing Working Capital include _____ (i.e., what are the general goals in managing Working Capital)? A2. Minimizing the amount of money invested in Net Working Capital (Current Assets less Current Liabilities) and minimizing the expenses associated with holding balances of Cash, Accounts Receivable, Inventories and Prepaid Expenses as well as minimizing the minimizing the financing costs/interest expense associated with Accounts Payable/Trade Credit and Short-Term Notes Payable while at the same time not hurting customer relations. Q3. What are the three (3) Current Asset Management Policies described in the textbook and what do they mean? Chapter 15 Questions

  4. Q1. “Working Capital Management” refers to the management of _____? A1. Current Assets: Cash, Accounts Receivable, Inventories, Prepaid Expenses and Current Liabilities: Accounts Payable, Short-Term Notes Payable, Accued Expenses, Current Maturities of Long-Term Debt. Q2. The Instructor said the challenges in managing Working Capital include _____ (i.e., what are the general goals in managing Working Capital)? A2. Minimizing the amount of money invested in Net Working Capital (Current Assets less Current Liabilities) and minimizing the expenses associated with holding balances of Cash, Accounts Receivable, Inventories and Prepaid Expenses as well as minimizing the minimizing the financing costs/interest expense associated with Accounts Payable/Trade Credit and Short-Term Notes Payable while at the same time not hurting customer relations. Q3. What are the three (3) Current Asset Management Policies described in the textbook and what do they mean? A3. (1) Relaxed: Hold relatively large balances of Cash, Accounts Receivable and Inventories to offset general risks (cash) and be generous to customers (A/R and Inventories). (Considered a lower-risk, lower-return approach). (2) Moderate: Hold moderate (not too large, not too small) balances of Cash, etc. (Considered a moderate risk, moderate return approach). (3) Restricted: Hold the smallest possible balances of Cash, etc. to absolutely minimize all expenses associated with Current Assets and Current Liabilities. (Considered a higher-risk, higher return approach). Chapter 15 Questions

  5. Q4. What are the three (3) Current Asset Financing Policies described in the textbook and what do they mean? Q5. What are the four (4) Working Capital measurement tools described in the text? Q6. What does the Cash Conversion Cycle measure, and why is it valuable to try and reduce it over time? Chapter 15 Questions

  6. Q4. What are the three (3) Current Asset Financing Policies described in the textbook and what do they mean? A4. (1) Moderate Approach (maturity matching of Assets and Liabilities). (2) Relatively Aggressive Approach (Use Short-Term Debt to finance some Long-Term Assets; considered a higher-risk, higher return approach). (3) Conservative Approach (Use Long-Term Debt and Equity to finance some Short-Term Assets; considered a lower-risk, lower-return approach). Q5. What are the four (4) Working Capital measurement tools described in the text? Q6. What does the Cash Conversion Cycle measure, and why is it valuable to try and reduce it over time? Chapter 15 Questions

  7. Q4. What are the three (3) Current Asset Financing Policies described in the textbook and what do they mean? A4. (1) Moderate Approach (maturity matching of Assets and Liabilities). (2) Relatively Aggressive Approach (Use Short-Term Debt to finance some Long-Term Assets; considered a higher-risk, higher return approach). (3) Conservative Approach (Use Long-Term Debt and Equity to finance some Short-Term Assets; considered a lower-risk, lower-return approach). Q5. What are the four (4) Working Capital measurement tools described in the text? A5. (1) Cash Conversion Cycle, (2) Inventory Conversion Period, (3) Average Collection Period, and (4) Payables Deferral Period. Q6. What does the Cash Conversion Cycle measure, and why is it valuable to try and reduce it over time? Chapter 15 Questions

  8. Q4. What are the three (3) Current Asset Financing Policies described in the textbook and what do they mean? A4. (1) Moderate Approach (maturity matching of Assets and Liabilities). (2) Relatively Aggressive Approach (Use Short-Term Debt to finance some Long-Term Assets; considered a higher-risk, higher return approach). (3) Conservative Approach (Use Long-Term Debt and Equity to finance some Short-Term Assets; considered a lower-risk, lower-return approach). Q5. What are the four (4) Working Capital measurement tools described in the text? A5. (1) Cash Conversion Cycle, (2) Inventory Conversion Period, (3) Average Collection Period, and (4) Payables Deferral Period. Q6. What does the Cash Conversion Cycle measure, and why is it valuable to try and reduce it over time? A6. The CCC measures the average amount of time between (a) paying Accounts Payable and (b) receiving all cash from all sales, so it represents the average amount of time a company would need to borrow Short-Term Loans. It is valuable to reduce this average time for Short-Term Loans to reduce interest expense. Cash Conversion Cycle = Inventory Conversion Period + Average Collection Period less Payables Deferral Period. Chapter 15 Questions

  9. Q7. What is the Inventory Conversion Period and the Average Collection Period, and why is it valuable to try and reduce them over time? Q8. What is the Payables Deferral Period, and what is its role in the Cash Conversion Cycle? Chapter 15 Questions

  10. Q7. What is the Inventory Conversion Period and the Average Collection Period, and why is it valuable to try and reduce them over time? Q7. The ICP attempts to measure the average amount of time it takes a company to sell its Inventories. It is valuable to try and reduce this because the longer the time it takes to sell Inventories, the larger a company’s investment in Inventories and the larger the expenses associated with Inventories (storage space, insurance, utilities, material handling, capital costs, etc.). The ACP measures the average amount of time it takes for a company to collect in cash its Accounts Receivable. The longer it takes to collect A/R, the larger the balance of A/R and the larger the capital costs associated with this asset investment. The shorter the time associated with the ICP and ACP, the shorter the CCC. Q8. What is the Payables Deferral Period, and what is its role in the Cash Conversion Cycle? Chapter 15 Questions

  11. Q7. What is the Inventory Conversion Period and the Average Collection Period, and why is it valuable to try and reduce them over time? Q7. The ICP attempts to measure the average amount of time it takes a company to sell its Inventories. It is valuable to try and reduce this because the longer the time it takes to sell Inventories, the larger a company’s investment in Inventories and the larger the expenses associated with Inventories (storage space, insurance, utilities, material handling, capital costs, etc.). The ACP measures the average amount of time it takes for a company to collect in cash its Accounts Receivable. The longer it takes to collect A/R, the larger the balance of A/R and the larger the capital costs associated with this asset investment. The shorter the time associated with the ICP and ACP, the shorter the CCC. Q8. What is the Payables Deferral Period, and what is its role in the Cash Conversion Cycle? A8. PDF attempts to measure the average amount of time it takes a company to pay its Accounts Payable. A shorter time period contributes to a longer CCC, and a longer time period contributes to a shorter CCC. Chapter 15 Questions

  12. Use the following information to answer Questions 9, 10 and 11. XYZ Corp. in 2011: Sales = $3,590,000 (280 days in fiscal year) Cost of Goods Sold = $2,513,000 Average Inventory Balance = $589,000 Average Accounts Receivable Balance= $612,000 Average Balance of Accounts Payable = $308,000 Q9. Compute and interpret the Inventory Conversion Period. Q10. Compute and Interpret the Average Collection Period. Q11. Compute and interpret the Payables Deferral Period and Cash Conversion Cycle. Chapter 15 Questions

  13. Use the following information to answer Questions 9, 10 and 11. XYZ Corp. in 2011: Sales = $3,590,000 (280 days in fiscal year) Cost of Goods Sold = $2,513,000 Average Inventory Balance = $589,000 Average Accounts Receivable Balance= $612,000 Average Balance of Accounts Payable = $308,000 Q9. Compute and interpret the Inventory Conversion Period. A9. ICP = Avg. Inventory Balance /(COGS/Days in Year) ICP = $589,000/($2,513,000/280) = $589,000/$8,975 = 65.63 days. It takes 65.63 days on average to sell inventories. Q10. Compute and Interpret the Average Collection Period. Q11. Compute and interpret the Payables Deferral Period and Cash Conversion Cycle. Chapter 15 Questions

  14. Use the following information to answer Questions 9, 10 and 11. XYZ Corp. in 2011: Sales = $3,590,000 (280 days in fiscal year) Cost of Goods Sold = $2,513,000 Average Inventory Balance = $589,000 Average Accounts Receivable Balance= $612,000 Average Balance of Accounts Payable = $308,000 Q9. Compute and interpret the Inventory Conversion Period. A9. ICP = Avg. Inventory Balance /(COGS/Days in Year) ICP = $589,000/($2,513,000/280) = $589,000/$8,975 = 65.63 days. It takes 65.63 days on average to sell inventories. Q10. Compute and Interpret the Average Collection Period. A10. ACP = Avg. A/R Balance/(Sales/Days in Year) AVP = $612,000/($3,590,000/280) = $612,000/$12,821.43 = 47.73 days. It takes 47.73 days on average to collect accounts receivable. Q11. Compute and interpret the Payables Deferral Period and Cash Conversion Cycle. Chapter 15 Questions

  15. Use the following information to answer Questions 9, 10 and 11. XYZ Corp. in 2011: Sales = $3,590,000 (280 days in fiscal year) Cost of Goods Sold = $2,513,000 Average Inventory Balance = $589,000 Average Accounts Receivable Balance= $612,000 Average Balance of Accounts Payable = $308,000 Q9. Compute and interpret the Inventory Conversion Period. A9. ICP = Avg. Inventory Balance /(COGS/Days in Year) ICP = $589,000/($2,513,000/280) = $589,000/$8,975 = 65.63 days. It takes 65.63 days on average to sell inventories. Q10. Compute and Interpret the Average Collection Period. A10. ACP = Avg. A/R Balance/(Sales/Days in Year) AVP = $612,000/($3,590,000/280) = $612,000/$12,821.43 = 47.73 days. It takes 47.73 days on average to collect accounts receivable. Q11. Compute and interpret the Payables Deferral Period and Cash Conversion Cycle. A11. PDP = Avg. A/P Balance/(COGS/Days in Year) PDP = $308,000/($2,513,000/280) = $308,000/$8,975 = 34.32 days. It takes 34.32 days on average to pay A/P. CCC = ICP + ACP - PDP = 65.63 days + 47.73 days – 34.32 days = 79.04 days. The average length of Short-Term Notes Payable is 79.04 days. Chapter 15 Questions

  16. Q12. What is the scope and purpose of the Cash Budget for a business? Chapter 15 Questions

  17. Q12. What is the scope and purpose of the Cash Budget for a business? A12. The Cash Budget is a tool used by the Treasury or Corporate Finance Department of a large organization to manage the daily cash position, to make sure there is enough cash in the bank each day after all expenditures are made. Accuracy in forecasting is important, so the time horizon is very short-term (next several days, weeks or months at a time). Chapter 15 Questions

  18. Use the following information for Questions 13, 14, 15, 16 and 17. XYZ Corp. reported sales of $150,000 in November, $330,000 in December, and forecasts sales of $240,000 for January, $250,000 for February, and $355,000 for March. The firm’s cost of goods sold every month is equal to 65% of the next month’s sales. All sales are made on credit, and the firm collects its receivables in 60 days (i.e., after two months). All of its cost of goods sold are financed with supplier trade credit. The company pays its payables for cost of goods sold in 30 days (i.e., after one month). Cash payments for fixed costs are $75,000 per month. Cash payments for capital expenditures are expected to be $10,000 in January and $50,000 in February. The firm begins January 1st with $100,000 in cash. TheTarget Cash balance is $25,000, and any Short-Term Loan used to meet the Target Cash Balance at the end of a month is assumed to be repaid at the beginning of the next month. Q13. Create a Monthly Cash Budget Table with this information to be able to answer the next series of questions. Chapter 15 Questions

  19. Q13. XYZ Corp. Monthly Cash Budget Table Chapter 15 Questions

  20. Q13. XYZ Corp. Monthly Cash Budget Table November December January February March Sales $150,000 $330,000 $240,000 $250,000 $355,000 COGS (.65 x next 214,500 156,000 162,500 230,750 not available yet month’s Sales) Chapter 15 Questions

  21. Q13. XYZ Corp. Monthly Cash Budget Table November December January February March Sales $150,000 $330,000 $240,000 $250,000 $355,000 COGS (.65 x next 214,500 156,000 162,500 230,750 not available yet month’s Sales) Cash Receipts (A): Sales in 60 days $150,000 $330,000 $240,000 Chapter 15 Questions

  22. Q13. XYZ Corp. Monthly Cash Budget Table November December January February March Sales $150,000 $330,000 $240,000 $250,000 $355,000 COGS (.65 x next 214,500 156,000 162,500 230,750 not available yet month’s Sales) Cash Receipts (A): Sales in 60 days $150,000 $330,000 $240,000 Cash Disbursements (B): COGS in 30 days $(214,500) $(156,000) $(162,500) $(230,750) Fixed Costs $( 75,000) $( 75,000) $( 75,000) Capital Expenditures $( 10,000) $( 50,000) $ - . Total Cash Disbursements $(241,000) $(287,500) $(305,750) Chapter 15 Questions

  23. Q13. XYZ Corp. Monthly Cash Budget Table November December January February March Sales $150,000 $330,000 $240,000 $250,000 $355,000 COGS (.65 x next 214,500 156,000 162,500 230,750 not available yet month’s Sales) Cash Receipts (A): Sales in 60 days $150,000 $330,000 $240,000 Cash Disbursements (B): COGS in 30 days $(214,500) $(156,000) $(162,500) $(230,750) Fixed Costs $( 75,000) $( 75,000) $( 75,000) Capital Expenditures $( 10,000) $( 50,000) $ - . Total Cash Disbursements $(241,000) $(287,500) $(305,750) Net Cash Flow (C = A + B): $( 91,000) $ 42,500 $( 65,750) Chapter 15 Questions

  24. Q13. XYZ Corp. Monthly Cash Budget Table November December January February March Sales $150,000 $330,000 $240,000 $250,000 $355,000 COGS (.65 x next 214,500 156,000 162,500 230,750 not available yet month’s Sales) Cash Receipts (A): Sales in 60 days $150,000 $330,000 $240,000 Cash Disbursements (B): COGS in 30 days $(214,500) $(156,000) $(162,500) $(230,750) Fixed Costs $( 75,000) $( 75,000) $( 75,000) Capital Expenditures $( 10,000) $( 50,000) $ - . Total Cash Disbursements $(241,000) $(287,500) $(305,750) Net Cash Flow (C = A + B): $( 91,000) $ 42,500 $( 65,750) Beginning Cash Balance: $ 100,000 $ 25,000 $ 51,500 Repay Prior Period Short-Term Loan $ 0 $( 16,000) $ 0 Net Cash Flow $( 91,000) $ 42,500 $( 65,750) Ending Cash Balance-Preliminary $ 9,000 $ 51,500 $( 14,250) Short-Term Loan Needed $ 16,000 $ 0 $ 39,250 Ending Cash Balance $ 25,000 $ 51,500 $ 25,000 Chapter 15 Questions

  25. Q14. What are total Cash Receipts expected to be in January? Q15. What is the Net Cash Flow expected to be in January? Q16. What is the Cash Balance expected to be at the end of February? Q17. What is the total expected amount of Cash Receipts for the month of February? Chapter 15 Questions

  26. Q14. What are total Cash Receipts expected to be in January? A14. $150,000 Q15. What is the Net Cash Flow expected to be in January? Q16. What is the Cash Balance expected to be at the end of February? Q17. What is the total expected amount of Cash Receipts for the month of February? Chapter 15 Questions

  27. Q14. What are total Cash Receipts expected to be in January? A14. $150,000 Q15. What is the Net Cash Flow expected to be in January? A15. $(91,000) Q16. What is the Cash Balance expected to be at the end of February? Q17. What is the total expected amount of Cash Receipts for the month of February? Chapter 15 Questions

  28. Q14. What are total Cash Receipts expected to be in January? A14. $150,000 Q15. What is the Net Cash Flow expected to be in January? A15. $(91,000) Q16. What is the Cash Balance expected to be at the end of February? A16. $51,500 Q17. What is the total expected amount of Cash Receipts for the month of February? Chapter 15 Questions

  29. Q14. What are total Cash Receipts expected to be in January? A14. $150,000 Q15. What is the Net Cash Flow expected to be in January? A15. $(91,000) Q16. What is the Cash Balance expected to be at the end of February? A16. $51,500 Q17. What is the total expected amount of Cash Receipts for the month of February? A17. $330,000 Chapter 15 Questions

  30. Q18. What are the four (4) components of a company’s Credit Policy? Q19. XYZ Corp. (“XYZ”) buys many of its raw materials from ABC Inc. (“ABC”). When ABC sends invoices to XYZ, ABC offers “3/15 net 45” credit terms to XYZ. What do these credit terms mean, and what is the Nominal Cost Annual Percentage Cost to XYZ of not taking ABC’s offered trade discount? Q20. If XYZ has a line of credit with a commercial bank which charges XYZ a 10% rate of interest on all short-term loans, what is the most economical thing XYZ can do with respect to any invoice from ABC? Chapter 15 Questions

  31. Q18. What are the four (4) components of a company’s Credit Policy? A18. (1) Credit Period, (2) Discounts, (3) Credit Standards, and (4) Collection Policy. How a company offers and manages the trade credit it offers to its customers determines to a great extent how large a company’s A/R balances will be. Q19. XYZ Corp. (“XYZ”) buys many of its raw materials from ABC Inc. (“ABC”). When ABC sends invoices to XYZ, ABC offers “3/15 net 45” credit terms to XYZ. What do these credit terms mean, and what is the Nominal Cost Annual Percentage Cost to XYZ of not taking ABC’s offered trade discount? Q20. If XYZ has a line of credit with a commercial bank which charges XYZ a 10% rate of interest on all short-term loans, what is the most economical thing XYZ can do with respect to any invoice from ABC? Chapter 15 Questions

  32. Q18. What are the four (4) components of a company’s Credit Policy? A18. (1) Credit Period, (2) Discounts, (3) Credit Standards, and (4) Collection Policy. How a company offers and manages the trade credit it offers to its customers determines to a great extent how large a company’s A/R balances will be. Q19. XYZ Corp. (“XYZ”) buys many of its raw materials from ABC Inc. (“ABC”). When ABC sends invoices to XYZ, ABC offers “3/15 net 45” credit terms to XYZ. What do these credit terms mean, and what is the Nominal Cost Annual Percentage Cost to XYZ of not taking ABC’s offered trade discount? A19. If the company pays its invoice by the 15th day from receipt of the goods/invoice, the company may take a 3% discount; otherwise, 100% of the invoice amount must be paid by the 45th day. Nominal % Cost = 3% . x 365 days in Year . (100% - 3%) (45 days – 15 days) Nominal % Cost = 0.030928 x 12.166667 = 0.376291 = 37.63% Q20. If XYZ has a line of credit with a commercial bank which charges XYZ a 10% rate of interest on all short-term loans, what is the most economical thing XYZ can do with respect to any invoice from ABC? Chapter 15 Questions

  33. Q18. What are the four (4) components of a company’s Credit Policy? A18. (1) Credit Period, (2) Discounts, (3) Credit Standards, and (4) Collection Policy. How a company offers and manages the trade credit it offers to its customers determines to a great extent how large a company’s A/R balances will be. Q19. XYZ Corp. (“XYZ”) buys many of its raw materials from ABC Inc. (“ABC”). When ABC sends invoices to XYZ, ABC offers “3/15 net 45” credit terms to XYZ. What do these credit terms mean, and what is the Nominal Cost Annual Percentage Cost to XYZ of not taking ABC’s offered trade discount? A19. If the company pays its invoice by the 15th day from receipt of the goods/invoice, the company may take a 3% discount; otherwise, 100% of the invoice amount must be paid by the 45th day. Nominal % Cost = 3% . x 365 days in Year . (100% - 3%) (45 days – 15 days) Nominal % Cost = 0.030928 x 12.166667 = 0.376291 = 37.63% Q20. If XYZ has a line of credit with a commercial bank which charges XYZ a 10% rate of interest on all short-term loans, what is the most economical thing XYZ can do with respect to any invoice from ABC? A20. XYZ should take ABC’s offered trade discount and pay the invoice on Day 15 (getting a 0% cost for 15 days) with funds borrowed under a short-term loan at a 10% interest rate. Chapter 15 Questions

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