Topic Week 11: Working Capital Management

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

• True

• False

Answer explanation

negative CCC means higher liquidity (working capital is not tied up for long.

Working capital alters a firm's value by affecting its free cash flow.

• True

• False

Working capital management involves the management of all of a firm's assets and liabilities.

• True

• False

Answer explanation

Cash needed for daily operations

The difference between a firm's operating cycle and its cash cycle is ________.

• its account receivable days

• its accounts payable days

• its inventory days

• There is no difference between the cash and operating cycles.

Answer explanation

The moment the firm buy the inventory until they make a payment to the supplier.

The cash conversion cycle (CCC) is defined as ________.

• Inventory Days + Accounts Receivable Days - Accounts Payable Days

• Inventory Days - Accounts Receivable Days - Accounts Payable Days

• Inventory Days + Accounts Receivable Days + Accounts Payable Days

• Inventory Days + Accounts Payable Days - Accounts Receivable Days

  Answer: A

Which of the following would decrease a firm's cash conversion cycle?

• Increase the inventory days.

• Increase the accounts receivable days.

• Increase the accounts payable days.

• Increase the cash days.

Answer explanation

Following the formula, Inventory Days + Accounts Receivable Days - Accounts Payable Days. Hence when account payable days increase, CCC decrease.

Collection float is the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods.

• True

• False

What is trade credit?

• the credit that a firm extends to its customers

• the amount a firm is owed by its customers who have received goods and services but have not yet paid for them

• the percentage discount offered to a customer who opts to pay their account early

• the amount that a firm owes its suppliers for goods which it has received but for which it has not yet paid.

Collection float is made up of all of the following EXCEPT ________.

• disbursement float

• processing float

• mail float

• availability float

What is the meaning of the term 2/10 net 30?

• If the invoice is paid within 10 days, a 2% discount can be taken. If the invoice is paid between 11 and 29 days, a 1% discount can be taken. After 30 days, the full invoice is due.

• If the invoice is paid within 2 days, a 10% discount can be taken; otherwise the full invoice is due in 30 days.

• If the invoice is paid within 2 days, a 10% discount can be taken; otherwise a 2% discount can be taken if the invoice is paid in 30 days.

• If the invoice is paid within 10 days, a 2% discount can be taken; otherwise the full invoice is due in 30 days.