Managerial Finance - Test 2 Study Questions
1.What is Working Capital?: Capital used in day-to-day
operations (Current assets - current liabilities)
2.Why us working capital important?: Decisions made about working
capital in the short-run determine whether the firm exists in the long-
run.
3.Key to Current asset planning: Matchin production schedules with
accurate sales forecasts
4.Differences in actual sales and forecasted sales can result in: 1.
Unexpected buildup
2. Reduction in inventory, affecting receivables and cash flow
5.Firm's current assets can be: 1. Self-liquidating
2. 'Permanent' current assets (Current asset that is used in a year, but is
always replenished)
6.Two questions we need to answer regarding working capital: 1. what is
the appropriate level for current assets, both in total and by specific
accounts? (risk assesment)
2. How should current assets be financed?
7.Current Asset Policies: 1. Relaxed current asset investment policy
2.Restricted current asset investment policy
3.Moderate current asset investment policy
8.Relaxed Current Asset Investment Policy: Relatively large amounts of
cash and marketable securities and inventories are carried and sales
are stimulated by a liberal credit policy that results in a high level of
receivables
9.Restricted current asset investment policy: Holdings of cash and
marketable securities and inventories are minimized
10.Moderate Current Asset Investment Policy: A policy between the
relaxed and restrictive policies.
11.Financing for current assets: 1. Aggressive approach
2. Conservative approach
12.aggressive approach: A policy under which all of the fixed assets of a
firm are financed with long-term capital, but some of the firm's
permanent current assets are financed with short-term nonspontaneous
sources of funds.
13.Conservative approach: A policy under which all of the fixed assets,
all of the permanent current assets, and some of the temporary current
assets of a firm are financed with long-term capital.
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, 14.Impact on Return on Investment (ROI):
15.Cash Conversion Cycle (CCC): the length of time required for a
company to convert cash invested in its operations to cash received as
a result of its operations. (CCC = inventory conversion period + Days
Sales outstanding - Paybles deferral period)
16.Reasons for cash: 1. Transactions balances - payment toward planned
expens- es
2.Compensating balances for banks
3.Precautionary need
4.Speculative balance - cash balance hld to enable the frim to take
advantage of any bargain purchases that might arise
17.Float: Difference between firm's recorded amount and amount
credited to firm by bank.
1.mail float
2.clearing float (for checks)
3.Small businesses experiences this more
often Tech companies (cash app/paypal)
minimize this
18.Marketable Securities: Funds held for other than immediate
transaction purpos- es should be invested in interest-earning securities.
1.treasury bills
2.federal agency securities
3.commercial paper, etc.
19.Collections and Disbursement Methods: Critical function of financial
manager is managing cash inflows and payment outflows.
1.Electronic transfer changes the time period between payment and
collection
2.Collection mechanism - lockboxes, US mail, international sales, and
synchroniz- ing cash flows
20.5 Cs of credit: Character, Capacity, Capital, Collateral, Conditions
21.The use of cash budgeting procedures:
1. Helps the firm plan its current asset levels for a given production plan
2. Makes managing inventory easier under seasonal production
3. Illustrates fluctuating levels of current assets for a given production plan
4. All of the options are correct.: All of the options are correct
22.A manager can be aggressive if the firm has all of the following EXCEPT:
1. Predictable cash-flow patterns
2. High amounts of permanent Current Assets
3. Stable inventory price
4. Basic access to capital markets: High amounts of permanent current
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1.What is Working Capital?: Capital used in day-to-day
operations (Current assets - current liabilities)
2.Why us working capital important?: Decisions made about working
capital in the short-run determine whether the firm exists in the long-
run.
3.Key to Current asset planning: Matchin production schedules with
accurate sales forecasts
4.Differences in actual sales and forecasted sales can result in: 1.
Unexpected buildup
2. Reduction in inventory, affecting receivables and cash flow
5.Firm's current assets can be: 1. Self-liquidating
2. 'Permanent' current assets (Current asset that is used in a year, but is
always replenished)
6.Two questions we need to answer regarding working capital: 1. what is
the appropriate level for current assets, both in total and by specific
accounts? (risk assesment)
2. How should current assets be financed?
7.Current Asset Policies: 1. Relaxed current asset investment policy
2.Restricted current asset investment policy
3.Moderate current asset investment policy
8.Relaxed Current Asset Investment Policy: Relatively large amounts of
cash and marketable securities and inventories are carried and sales
are stimulated by a liberal credit policy that results in a high level of
receivables
9.Restricted current asset investment policy: Holdings of cash and
marketable securities and inventories are minimized
10.Moderate Current Asset Investment Policy: A policy between the
relaxed and restrictive policies.
11.Financing for current assets: 1. Aggressive approach
2. Conservative approach
12.aggressive approach: A policy under which all of the fixed assets of a
firm are financed with long-term capital, but some of the firm's
permanent current assets are financed with short-term nonspontaneous
sources of funds.
13.Conservative approach: A policy under which all of the fixed assets,
all of the permanent current assets, and some of the temporary current
assets of a firm are financed with long-term capital.
1/
9
, 14.Impact on Return on Investment (ROI):
15.Cash Conversion Cycle (CCC): the length of time required for a
company to convert cash invested in its operations to cash received as
a result of its operations. (CCC = inventory conversion period + Days
Sales outstanding - Paybles deferral period)
16.Reasons for cash: 1. Transactions balances - payment toward planned
expens- es
2.Compensating balances for banks
3.Precautionary need
4.Speculative balance - cash balance hld to enable the frim to take
advantage of any bargain purchases that might arise
17.Float: Difference between firm's recorded amount and amount
credited to firm by bank.
1.mail float
2.clearing float (for checks)
3.Small businesses experiences this more
often Tech companies (cash app/paypal)
minimize this
18.Marketable Securities: Funds held for other than immediate
transaction purpos- es should be invested in interest-earning securities.
1.treasury bills
2.federal agency securities
3.commercial paper, etc.
19.Collections and Disbursement Methods: Critical function of financial
manager is managing cash inflows and payment outflows.
1.Electronic transfer changes the time period between payment and
collection
2.Collection mechanism - lockboxes, US mail, international sales, and
synchroniz- ing cash flows
20.5 Cs of credit: Character, Capacity, Capital, Collateral, Conditions
21.The use of cash budgeting procedures:
1. Helps the firm plan its current asset levels for a given production plan
2. Makes managing inventory easier under seasonal production
3. Illustrates fluctuating levels of current assets for a given production plan
4. All of the options are correct.: All of the options are correct
22.A manager can be aggressive if the firm has all of the following EXCEPT:
1. Predictable cash-flow patterns
2. High amounts of permanent Current Assets
3. Stable inventory price
4. Basic access to capital markets: High amounts of permanent current
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