Current Asset Management

Net working capital is defined as ________.

• current liabilities minus current assets

• total liabilities minus total assets

• current assets minus current liabilities

• total assets minus total liabilities

The goal of working capital management is to ________.

• achieve a balance between short-term and long-term liabilities so that they add to the achievement of a firm's overall goals

• achieve a balance between a firm's non-current assets and non-current liabilities

• achieve a balance between profitability and risk that contributes positively to a firm's value

• achieve a balance between short-term and long-term assets so that they add to the achievement of a firm's overall goals

A(n) ________ in current assets increases net working capital, thereby ________ the risk of insolvency.

• increase; reducing

• increase; increasing

• decrease; increasing

• decrease; reducing

In working capital management, risk is measured by the probability that a firm will be ________.

• unable to earn profits from day-to-day operations

• unable to repay its long-term obligations

• unable to pay its bills as they come due

• unable to pay annual dividends to stockholders

If a firm increases its current assets relative to total assets, ________.

• it reduces return and reduces risk

• it increases return and increases risk

• it increases return and reduces risk

• it reduces return and increases risk

The conservative funding strategy is a strategy by which a firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.

• TRUE

• FALSE

Under an aggressive funding strategy, a firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt.

• TRUE

• FALSE

A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's average age of inventory is ________ days.

• 50

• 80

• 90

• 70

A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Its operating cycle is ________ days.

• 130

• 105

• 95

• 60

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an ________.

• decrease of 30 days in the cash conversion cycle

• increase of 30 days in the cash conversion cycle

• increase of 30 days in the cash conversion cycle

• decrease of 15 days in the cash conversion cycle