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FM (Test) > C Rote > Flashcards

C Rote Flashcards

1
Q

Equation for cash operating cycle?

A

Inventory holding period + AR collection period - AP payment period

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2
Q

Overcapitalisation effect on current ratio?

A

Increases it

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3
Q

Overcapitalisation effect on long-term capital?

A

Result of an organisation having too much long-term capital

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4
Q

When does overtrading often arise from?

A

A rapid increase in sales revenue

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5
Q

When does overtrading often result in?

A

In a relatively high accounts payable turnover period

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6
Q

What is overtrading also known as?

A

Undercapitalisation

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7
Q

What happens to profitability when there’s an increase in cash operating cycle?

A

Decreases it

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8
Q

Does working capital increase as sales increase?

A

Yes

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9
Q

What does factoring with no recourse provide insurance for?

A

Against bad debts

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10
Q

What can the expertise of a factor increase?

A

The efficiency of trade receivables management for a company

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11
Q

Is commercial paper applicable to management of foreign debts?

A

NO

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12
Q

Does damage to goodwill relate to receivables or payables

A

Payables

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13
Q

Does early settlement discounts lost relate to receivables or payables

A

Payables

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14
Q

Does increased risk of bad debts relate to receivables or payables

A

Receivables

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15
Q

Relatively high level of current assets corresponds to which working capital strategy?

A

Conservative investment strategy

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16
Q

Relatively low level of current assets corresponds to which working capital strategy?

A

Aggressive investment strategy

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17
Q

Relatively large amounts of short-term finance to which working capital strategy?

A

Conservative financing strategy

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18
Q

Relatively small amounts of short-term finance to which working capital strategy?

A

Aggressive financing strategy

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19
Q

What is meant by a conservative working capital investment policy refer to?

A

A higher amount invested in working capital

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20
Q

Is long-term or short-term finance more expensive?

A

Long-term

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21
Q

Solution for long-term cash surplus (shares)

A

Buy back the company’s shares

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22
Q

Solution for long-term cash surplus (bank account)

A

Invest in a long-term deposit bank account

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23
Q

Solution for short-term cash surplus (suppliers discount)

A

Pay suppliers earlier to take advantage of any prompt payment discounts

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24
Q

Why will working capital naturally increase with sales?

A

More inventory is needed to satisfy demand and more credit is offered to more customers

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25
Q

What does lengthening of the operating cycle lead to?

A

To cash being out of the business for longer and more funding needed to cover this

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26
Q

What is meant by overtrading?

A

Where business doesn’t have enough cash funding to sustain the level of trading activity

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27
Q

Longer to pay trade payables effect on cash cycle?

A

Shorterns the cash cycle as cash stays with company possession for a longer period of time

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28
Q

Does depreciation affect the cash cycle?

A

No as it is a non-cash item

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29
Q

What are signs of a lengthening cash cycle?

A

Lower net operating cash flows and slower inventory turnovers

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30
Q

Effect on current ratio for a company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items

A

Decrease. as numerator will decrease

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31
Q

Effect on quick ratio for a company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items

A

Increase. as there is a higher cash balance in the numerator

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32
Q

What are key aspects of a company’s accounts receivable credit policy? (credit)

A

Assessing creditworthiness

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33
Q

What are key aspects of a company’s accounts receivable credit policy? (invoicing)

A

Invoicing promptly and collecting overdue debts

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34
Q

Is a corporation tax payment a cash or non-cash payment?

A

Cash

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35
Q

Is a dividend receipt from a short-term investment a cash or non-cash payment?

A

Cash

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36
Q

Is the loss made on the disposal of an item of machinery a cash or non-cash payment?

A

Non-cash

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37
Q

Is a bad debt written off a cash or non-cash payment?

A

Non-cash

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38
Q

Is an increase in a provision cash or non-cash payment?

A

Non-cash

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39
Q

Is the receipt of funding for the purchase of a new vehicle a cash or non-cash payment?

A

Cash

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40
Q

Overtrading and current ratio?

A

Short-term increase, long-term decrease

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41
Q

Overtrading and revenue?

A

Rapid increase

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42
Q

Overtrading and volume of current assets?

A

Rapid increase

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43
Q

What is customer power increasing associated with?

A

An increased receivables collection period, not payables payment period

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44
Q

What is a risk associated with an increased AP payment period (goodwill)

A

Losing supplier goodwill

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45
Q

What is a risk associated with an increased AP payment period (payment)

A

Losing prompt payment discounts

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46
Q

What is a risk associated with an increased AP payment period (price)

A

Suppliers increasing the price to compensate

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47
Q

What does JIT inventory aim to create?

A

A flexible production process that is responsive to the customer’s requirements

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48
Q

Inventory ordering costs and JIT?

A

Are high

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49
Q

Inventory holding costs and JIT?

A

Zero

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50
Q

Aim of JIT system of inventory control (capital)

A

Reduction in capital tied up in inventory

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51
Q

Aim of JIT system of inventory control (add value)

A

Elimination of all activities performed that do not add value

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52
Q

What are motives for holding cash?

A

Transactions and precautionary motive

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53
Q

Which impact will be the smallest for a large listed company financed by both equity and debt?

A

Dividend policy

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54
Q

What is the benefit of implementing JIT?

A

Amount of obsolete inventory will be minimised

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55
Q

Why is quality control more important under JIT?

A

Breakdowns become very costly when there is no buffer inventory

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56
Q

Finance costs in JIT?

A

Will be minimised

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57
Q

Raw materials in JIT?

A

Need to be delivered more frequently

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58
Q

Is commercial paper short or long term?

A

It is short-term

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59
Q

Are corproate bonds short or long term?

A

Long term

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60
Q

When can companies decide to buy treasury bills?

A

If they have short-term cash surpluses

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61
Q

How will a commercial paper be issued?

A

At a discount and then repaid at nominal value on the settlement date

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62
Q

What does Baumol model assume for cash flow?

A

Cash flows are steady and predictable

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63
Q

What does Miller Orr model assume for cash flow?

A

Cash flows are more erratic

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64
Q

What do Baumol and Miller Orr model both assume for cash held?

A

Cash is held in either a current account or short-term investments and can easily be switched between the two

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65
Q

When does Miller Orr take back current account balance to the return point?

A

When either the higher or lower limitis hit

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66
Q

Do Miller Orr and Baumol take into account transaction costs of switching ebtween current accounts and investments?

A

YES

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67
Q

What does a conservative working capital policy refer to?

A

Higher amount ivnested in working capital

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68
Q

Why is long-term finance more expensive than short-term finance?

A

It is more expensive as it is riskier for the lender

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69
Q

How are most current assets financed with an aggressive working capital funding policy?

A

Are financed with short-term fudnign rather than long-term funding. Keeps funding costs low but risk higher

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70
Q

What does an aggressive working capital funding policy refer to?

A

An organisation using short-term funding to finance most current assets, such as buffer inventory

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71
Q

Assets and liabilities in an aggressive working capital funding policy refer to?

A

Low values of current assets and high values of current liabilities

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72
Q

Is long-term debt finance riskier for the lender than short-term debt finance?

A

Yes

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73
Q

Which working capital strategy is relatively high level of current assets?

A

Conservative investment strategy

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74
Q

Which working capital strategy is relatively low level of current assets?

A

Aggressive investment strategy

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75
Q

Which working capital strategy is relatively large amounts of short-term finance?

A

Aggressive financing strategy

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76
Q

Which working capital strategy is relatively small amounts of short-term finance?

A

Conservative financing strategy

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77
Q

When does net working capital increase?

A

Only if current assets are increased or current liabilities are decreased

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78
Q

Effect of exchanging accounts payable or an overdraft (current liability) for a two-year bank loan or equity (long-term finance) on liabilities?

A

Decrease current liabilities and increase working capital

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79
Q

What indicates that a company is becoming more conservative in its working capital funding policy?

A

Increase in the ratio of long-term finance to current liabilities

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80
Q

What happens when working capital financing policy become more conservative?

A

An increasing proportion of current assets are funded by long-term sources of finance

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81
Q

What does overtrading mean?

A

A business grows rapidly but in an unsustainable and badly controlled way

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82
Q

Effect of overtrading on revenues and costs?

A

Although revenues and profits may be rising, costs are likely to be out of control, and hence margins falling.

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83
Q

Which working capital financing policy would expose a company to the greatest risk of being unable to meet its obligations as they fall due?

A

Financing permanent current assets with svhort-term debt

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84
Q

A company has a current ratio of 2.3 and a quick ratio of 0.8. It increases its overdraft in order to buy more inventory as a cash purchase

What happens to current and quick ratio?

A

Decreases them

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85
Q

Overtrading effect on overtrading?

A

It is associated with falling liquidity

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86
Q

What is meant by an aggressive approach to financing?

A

Involves a large proportion of short-term finance which is usually relatively cheap

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87
Q

Can a rapid increase in sales mean overtrading?

A

YES

88
Q

Overtrading’s effect on AP turnover period?

A

May increase it

89
Q

What does overcapitalisation result in?

A

A relatively high current ratio and is the result of having too much long-term capital

90
Q

Why is long-term finance generally more expensive than short-term finance?

A

It is riskier for the lender

91
Q

What does a conservative working capital investment policy refer to?

A

A higher amount invested in working capital

92
Q

What working capital strategy does a conservative investment strategy represent?

A

Relatively high level of current assets

93
Q

What working capital strategy does an aggressive investment strategy represent?

A

Relatively low level of current assets

94
Q

What working capital strategy does an aggressive financing strategy represent?

A

Relatively large amounts of short term finance

95
Q

What working capital strategy does a conservative financing strategy represent?

A

Relatively small amounts of short term finance

96
Q

What determines the Economic Order Quantity (EOQ)? (Holding)

A

Holding cost per unit of inventory

97
Q

What determines the Economic Order Quantity (EOQ)? (Placing)

A

Cost of placing an order for inventory

98
Q

What determines the Economic Order Quantity (EOQ)? (Demand)

A

Annual demand

99
Q

In inventory management, which of the following will tend to increase the level of safety stock?

A

Variability of lead-time increases, as safety stock needed to reduce stock-outs will decrease

100
Q

What does EOQ assume about holding costs?

A

That holding costs depend on the average level of inventory

101
Q

What is true of both EOQ and ROL?

A

Both are influenced by demand

102
Q

What is least relevant to EOQ?

A

Safety stock, as EOQ is independent on any decision

103
Q

What is the main objective of JIT?

A

To reduce the level of inventory and hence holding costs

104
Q

What happens when there’s an increase in the cost of holding inventory?

A

Would lead to a smaller order quantity and hence a reduction in average level of inventory.

105
Q

What is commercial paper?

A

An unsecured, short-term debt instrument issued by a corporation.

106
Q

What is meant by default risk?

A

Risk that the security will not be repaid because the issuing entity is insolvent or illiquid

107
Q

What is meant by treasury bills?

A

Short-term debts issued by the government, which has virtually no risk of being insolvent or illiquid

108
Q

When there’s a greater variability in cash flows?

A

The greater is the spread between the upper and lower cash balance limits

109
Q

What is an assumption of the Baumol model but not of the Miller-Orr model?

A

Constant usage of cash. Miller-Orr can deal with variability in cash balances

110
Q

The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The company currently offers customers terms of 3% discount for settlement within 10 days or full payment within 30 days

What is most likely to improve the company’s AR turnover ratio?

A

Entering into a factoring agreement with a finance company

111
Q

What involves outsourcing the administration of the receivables ledger?

A

Debt factoring

112
Q

What role would the money market have in a letter of credit arrangement?

A

Discounting the banker’s acceptance

113
Q

What does sale of land increase (ratios)

A

Would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio

114
Q

Which ratio would most likely be used by management to evaluate short-term liquidity?

A

Acid test (quick) ratio

115
Q

A company has a current ratio of 2. Due to having significant surplus cash balances, it has decided to pay its trade payables after 30 days in future, rather than after 50 days as it has in the past.

How does this affect current ratio and operating cycle?

A

Increases both, as suppliers are paid more quickly

116
Q

A decrease in holding costs affects the EOQ how?

A

It increases it

117
Q

No holding of buffer stock a feature of JIT?

A

Yes

118
Q

Long production runs a feature of JIT?

A

No

119
Q

Geographical proximity to suppliers a feature of JIT?

A

Yes

120
Q

High quality raw materials inventory a feature of JIT?

A

Yes

121
Q

What does invoice discounting normally involve?

A

Receiving a cash advance from a finance house based on a percentage of the value of selected invoices

122
Q

Will the accounts receivable be sold above their face value in debt factoring?

A

NO

123
Q

How much cash will factor be prepared to provide in debt factoring?

A

Around 80% of the value of receivables

124
Q

Main objective of working capital management (liquid)

A

Ensures company has sufficient liquid resources

125
Q

Main objective of working capital management (profitability)

A

To increase company’s liquidity

126
Q

Benefits of with-recourse factoring for company (reduction)

A

Reduction in accounts receivable staffing costs

127
Q

Benefits of with-recourse factoring for company (liquidity)

A

An improvement in short-term liquidity

128
Q

What is a conservative working capital finance approach?

A

Low risk but expensive

129
Q

Benefit of good working capital management?

A

Adds to the wealth of shareholders

130
Q

Overtrading effect on inventory?

A

Increasing levels of inventory

131
Q

Overtrading effect on current liabilities?

A

Increasing levels of current liabilities

132
Q

What can discounting bills of exchange reduce?

A

Foreign accounts receivable default risk

133
Q

What is meant by working capital funding strategy for current assets?

A

Fluctuating current assets should be financed from a short-term source

134
Q

Risk of an aggressive approach?

A

There is an increased risk of liquidity and cash flow problems

135
Q

Why should sufficient working capital be maintained?

A

Ensure bills can be paid in time

136
Q

Why is having excessive working capital not ideal?

A

Working capital (receivables, inventory, payables) do not earn a return

137
Q

What is a conservative approach to working capital investment imply?

A

Aiming to keep relatively high levels of working capital

138
Q

Does having too much working capital reduce profitability?

A

Yes

139
Q

What are the two main objectives of working capital management?

A

Ensure business has sufficient liquid resources and increase profitability

140
Q

Which form of assets give the lowest returns?

A

Liquid assets

141
Q

Which approach best aligns to all non-current assets, permanent current assets and part of fluctuating current assets are financed by long-term funding?

A

A conservative approach to financing working capital

142
Q

Which approach best aligns to increased risk of liquidity and cash flow problems?

A

An aggressive approach to financing working capital

143
Q

Is constant demand an assumption in EOQ?

A

Yes

144
Q

Is zero lead time an assumption in EOQ?

A

No

145
Q

JIT and level of inventory?

A

Operates with very low levels of inventory

146
Q

Using EOQ and inventory control system means?

A

That holding and ordering costs should be the same

147
Q

What is meant by periodic review in inventory control systems?

A

Ordering inventory at a fixed and regular time interval

148
Q

What costs change when moving from EOQ to JIT?

A

Total annual inventory holding costs are expected to fall and total annual invnetory ordering costs would be expected to rise

149
Q

Benefits of JIT (levels)

A

Reduced inventory levels

150
Q

Benefits of JIT (waste)

A

Less waste

151
Q

Benefits of JIT (production)

A

Reduced production times

152
Q

Benefits of JIT (quality)

A

Improved quality of output

153
Q

Do supplier’s terms influence credit policy for accounts payable or accounts receivable?

A

Accounts payable

154
Q

Do competitors’ terms influence credit policy for accounts payable or accounts receivable?

A

Accounts receivable

155
Q

Do risk of irrecoverable debts influence credit policy for accounts payable or accounts receivable?

A

Accounts receivable

156
Q

Do financing costs for accounts payable or accounts receivable?

A

Accounts receivable

157
Q

Is customer aware that invoice discounting is being used?

A

No

158
Q

How do invoice discounters lend money?

A

Using the business’ receivables assets as security

159
Q

What do debt factors effectively purchase?

A

The receivables assets from the business

160
Q

Is advising existing customers on payment terms AR or AP?

A

AR

161
Q

Is determining whether to accept cash discounts AR or AP?

A

AP

162
Q

Is giving credit references to third parties AR or AP?

A

AR

163
Q

Is investigating potential customers’ creditworthiness AR or AP?

A

AR

164
Q

Is rapid increase in current assets a symptom of over-trading?

A

Yes

165
Q

Is increase in inventory holding and accounts receivable collection periods a symptom of over-trading?

A

Yes

166
Q

Is rapid increase in revenue a symptom of over-trading?

A

Yes

167
Q

What does increasing shareholder funds suggest?

A

A business that is aware of an increasing need for extra capital as it expands and that shareholders understand that need

168
Q

What is meant by overtrading?

A

An increase in business activity without the necessary increase in capitalto support it

169
Q

Both fluctuating and permanent currentassets financed by short-term fund (aggressive or conservative financing strategy)

A

Aggressive, as short-term funding

170
Q

Delay paying creditors (payables) for aslong as possible (aggressive or conservative financing strategy)

A

Aggressive, as payables is short-term funding

171
Q

What is a cash forecast?

A

Estimate of cash receipts and payments for a future period under existing conditions

172
Q

What is done after a cash forecast?

A

Modify cash flows, raise new capital, or invest surplus funds

173
Q

What is a cash budget?

A

A commitment to a plan for cash receipts and payments for a future period after taking any action necessary to bring the preliminary cash forecast into conformity with the overall plan ofthe business

174
Q

Advantage of centralised treasury function (foreign)

A

Better foreign currency risk management

175
Q

Advantage of centralised treasury function (borrowing)

A

Borrowing can be made at more advantageous rates

176
Q

Advantage of centralised treasury function (profits)

A

Treasury function can be run as a profit centre to raise additional profits

177
Q

When is a long operating cycle more serious (period)

A

In a period of strong growth

178
Q

When do operating cycles tend to be longer?

A

In brand new businesses compared to established businesses

179
Q

How to reduce foreign accounts receivable default risk?

A

Discounting bills of exchange

180
Q

What are company’s worried about when expecting to receive foreign currency from FAR?

A

Will be concerned about the risk of foreign currency depreciating

181
Q

What is the safest way to prevent non-payment for FAR?

A

If payment was received before shipping

182
Q

When are future insurance premiums higher?

A

If a foreign customer defaults

183
Q

Is centralised treasury mnanagement more or less responsive?

A

Less responsive as juggling work for all units at the same time

184
Q

What does a centralised treasury department minimises (hedging)

A

Hedging transactions and therefore reduce the costs of hedging foreign currency risk

185
Q

How can a centralised treasury department minimise hedging transactions?

A

By netting off currency and borrowing/deposit requirements and onlyhedging the net exposure rather than every single transaction

186
Q

What must be done for current assets for a working capital funding strategy?

A

Fluctuating current assets should be financed from a short-term source

187
Q

An aggressive strategy aim to maximise?

A

Profitability despite the risk of doing so

188
Q

Why is short-term finance generally cheaper than long-term?

A

As there is less risk for the lender so lender can’t demand a high return

189
Q

Why are overdrafts more expensive even though they are short-term?

A

As they are unsecured

190
Q

What does moderate working capital funding strategies use?

A

The matching principle

191
Q

How should current assets that are permanently in place be financed?

A

With long-term funding

192
Q

Advantages of accepting early payment discount for Product Q?

A

Increase in profit margins, improved business reputation

193
Q

Effect on current ratio if short-term liabilities are replaced with long-term finance?

A

Current ratio increases

194
Q

Is trade credit long-term or short-term finance?

A

Short-term

195
Q

Is bank loan long-term or short-term finance?

A

Long-term

196
Q

What happens to working capital when sales increases?

A

It increases

197
Q

Effect on profitability with an increase in the cash operating cycle?

A

It decreases

198
Q

What is overtrading known as?

A

Under-capitalisation

199
Q

Why does JIT require close integration with suppliers?

A

Aim would be to eliminate the holding of inventory the operating cycle shortens but the risk of stock-outs rises

200
Q

Characteristics of an aggressive policy for current assets?

A

Holding low levels of current assets

201
Q

Are current liabilities higher than current assets in an aggressive financing policy?

A

Yes

202
Q

What does factoring with recourse mean?

A

If a customer fails to pay their invoice the company that made the sale

203
Q

What can expertise of a factor increase?

A

The efficiency of trade receivables management for a company

204
Q

What does EOQ model assume?

A

Holding costs depend on the average inventory level

205
Q

Is EOQ calculation unaffected by buffer inventory?

A

Yes

206
Q

Does holding buffer inventory increase costs?

A

Increases inventory holding costs to manage stockout risks

207
Q

What is analysis of yield curve relate to?

A

Relates to the relationship between short and long-term interest rates

208
Q

What is a certificate of deposit an example of?

A

A money market instrument

209
Q

Characteristics of commercial paper?

A

Short-term low risk debt

210
Q

How are treasury bills bought and sold?

A

On a discount basis

211
Q

What does efficient markets hypothesis test?

A

The pricing efficiency of the stock market

212
Q

If market is weak-form efficient and pricing?

A

Prices already reflect all historic data and prices changes cannot be predicted by analysing historic price trends

213
Q

What can be done to reduce foreign accounts receivable default risk?

A

DIscounting bills of exchange

214
Q

What does a centralised treasury department minimise?

A

The number of hedging transactions, reducing the costs of hedging foreign currency risk

215
Q

How should fluctuating current assets be financed?

A

From a short-term source

216
Q

How should permanent current assets be financed according to the matching principle?

A

From a long-term source

FM (Test) (8 decks)

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