FM CH-13 Working Capital

Thrifty CO's cash budget highlights a short-term surplus in the near future.

Which of the following actions would be appropriate to make use of the surplus?

• Pay suppliers earlier to take advantage Of any prompt payment discounts

• Buy back the company's shares

• Increase payables by delaying payment to suppliers

• Invest in a long term deposit bank account

Which of the following might be associated with a shortening working capital cycle?

• Lower net operating cash flow

• Increasing tax-allowable depreciation expenditure

• Slower inventory turnover

• Taking longer to pay suppliers

The cash cycle is equal to which Of the following?

• Accounts receivable collection period plus inventory holding period minus accounts

  payable payment period

• Inventory holding period minus accounts receivable collection period minus accounts

  payable payment

• Accounts receivable collection period plus inventory holding period plus accounts

  payable payment period

• Accounts receivable collection period minus accounts payable payment period minus

  inventory holding period

A company has annual credit sales of $27 million and related cost of sales of $15 million. The

company has the following targets for the next year:

Accounts receivable collection period 50 days

Inventory holding period 60 days

Accounts payable payment period 45 days

Assume there are 360 days in the year.

What is the net investment in working capital required for the next year?

• $4,375,000

• $2,875,000

• $6,375,000

• $8,125,000

Which TWO of the following would be key aspects of a company's accounts receivable

credit policy?

• Assessing creditworthiness

• Checking credit limits once a year

• Invoicing promptly and collecting overdue debts

• Delaying payments to obtain a 'free' source of finance

For a retailer, let

S = Sales

P = purchases

O = Opening inventory

C = Closing inventory

D = Opening receivables

R = Closing receivables

Which of the following is the best expression for the accounts receivable collection period

at the period end?

• (D + R]/P x 365

• (D + R]/S x 365

• R/S x 365

• D/S x 365

Which of the following is NOT usually associated with overtrading?

• An increase in the current ratio

• A rapid increase in revenue

• A rapid increase in the volume of current assets

• Most of the increase in current assets being financed by credit

Generally, increasing the accounts payable payment period suggests advantage is being

taken of available credit but there are risks involved.

Which of the following is unlikely to be one of the risks involved in increasing the accounts

payable payment period?

• Customer bargaining power increasing

• Losing supplier goodwill

• Losing prompt payment discounts

• Suppliers increasing the price to compensate

Which TWO of the following are aims of a Just in Time system of inventory control?

• Reduction in capital tied up in inventory

• Creation Of an inflexible production process

• Elimination of all activities performed that do not add value

• Lowering of inventory ordering costs

Although cash needs to be invested to earn returns, businesses need to keep a certain

amount readily available.

Which TWO of the following are reasons for holding cash?

• Movement motive

• Transactions motive

• Precautionary motive

• Asset motive