C Rote Flashcards
1
Q
Equation for cash operating cycle?
A
Inventory holding period + AR collection period - AP payment period
2
Q
Overcapitalisation effect on current ratio?
A
Increases it
3
Q
Overcapitalisation effect on long-term capital?
A
Result of an organisation having too much long-term capital
4
Q
When does overtrading often arise from?
A
A rapid increase in sales revenue
5
Q
When does overtrading often result in?
A
In a relatively high accounts payable turnover period
6
Q
What is overtrading also known as?
A
Undercapitalisation
7
Q
What happens to profitability when there’s an increase in cash operating cycle?
A
Decreases it
8
Q
Does working capital increase as sales increase?
A
Yes
9
Q
What does factoring with no recourse provide insurance for?
A
Against bad debts
10
Q
What can the expertise of a factor increase?
A
The efficiency of trade receivables management for a company
11
Q
Is commercial paper applicable to management of foreign debts?
A
NO
12
Q
Does damage to goodwill relate to receivables or payables
A
Payables
13
Q
Does early settlement discounts lost relate to receivables or payables
A
Payables
14
Q
Does increased risk of bad debts relate to receivables or payables
A
Receivables
15
Q
Relatively high level of current assets corresponds to which working capital strategy?
A
Conservative investment strategy
16
Q
Relatively low level of current assets corresponds to which working capital strategy?
A
Aggressive investment strategy
17
Q
Relatively large amounts of short-term finance to which working capital strategy?
A
Conservative financing strategy
18
Q
Relatively small amounts of short-term finance to which working capital strategy?
A
Aggressive financing strategy
19
Q
What is meant by a conservative working capital investment policy refer to?
A
A higher amount invested in working capital
20
Q
Is long-term or short-term finance more expensive?
A
Long-term
21
Q
Solution for long-term cash surplus (shares)
A
Buy back the company’s shares
22
Q
Solution for long-term cash surplus (bank account)
A
Invest in a long-term deposit bank account
23
Q
Solution for short-term cash surplus (suppliers discount)
A
Pay suppliers earlier to take advantage of any prompt payment discounts
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
25
What does lengthening of the operating cycle lead to?
To cash being out of the business for longer and more funding needed to cover this
26
What is meant by overtrading?
Where business doesn't have enough cash funding to sustain the level of trading activity
27
Longer to pay trade payables effect on cash cycle?
Shorterns the cash cycle as cash stays with company possession for a longer period of time
28
Does depreciation affect the cash cycle?
No as it is a non-cash item
29
What are signs of a lengthening cash cycle?
Lower net operating cash flows and slower inventory turnovers
30
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
Decrease. as numerator will decrease
31
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
Increase. as there is a higher cash balance in the numerator
32
What are key aspects of a company's accounts receivable credit policy? (credit)
Assessing creditworthiness
33
What are key aspects of a company's accounts receivable credit policy? (invoicing)
Invoicing promptly and collecting overdue debts
34
Is a corporation tax payment a cash or non-cash payment?
Cash
35
Is a dividend receipt from a short-term investment a cash or non-cash payment?
Cash
36
Is the loss made on the disposal of an item of machinery a cash or non-cash payment?
Non-cash
37
Is a bad debt written off a cash or non-cash payment?
Non-cash
38
Is an increase in a provision cash or non-cash payment?
Non-cash
39
Is the receipt of funding for the purchase of a new vehicle a cash or non-cash payment?
Cash
40
Overtrading and current ratio?
Short-term increase, long-term decrease
41
Overtrading and revenue?
Rapid increase
42
Overtrading and volume of current assets?
Rapid increase
43
What is customer power increasing associated with?
An increased receivables collection period, not payables payment period
44
What is a risk associated with an increased AP payment period (goodwill)
Losing supplier goodwill
45
What is a risk associated with an increased AP payment period (payment)
Losing prompt payment discounts
46
What is a risk associated with an increased AP payment period (price)
Suppliers increasing the price to compensate
47
What does JIT inventory aim to create?
A flexible production process that is responsive to the customer's requirements
48
Inventory ordering costs and JIT?
Are high
49
Inventory holding costs and JIT?
Zero
50
Aim of JIT system of inventory control (capital)
Reduction in capital tied up in inventory
51
Aim of JIT system of inventory control (add value)
Elimination of all activities performed that do not add value
52
What are motives for holding cash?
Transactions and precautionary motive
53
Which impact will be the smallest for a large listed company financed by both equity and debt?
Dividend policy
54
What is the benefit of implementing JIT?
Amount of obsolete inventory will be minimised
55
Why is quality control more important under JIT?
Breakdowns become very costly when there is no buffer inventory
56
Finance costs in JIT?
Will be minimised
57
Raw materials in JIT?
Need to be delivered more frequently
58
Is commercial paper short or long term?
It is short-term
59
Are corproate bonds short or long term?
Long term
60
When can companies decide to buy treasury bills?
If they have short-term cash surpluses
61
How will a commercial paper be issued?
At a discount and then repaid at nominal value on the settlement date
62
What does Baumol model assume for cash flow?
Cash flows are steady and predictable
63
What does Miller Orr model assume for cash flow?
Cash flows are more erratic
64
What do Baumol and Miller Orr model both assume for cash held?
Cash is held in either a current account or short-term investments and can easily be switched between the two
65
When does Miller Orr take back current account balance to the return point?
When either the higher or lower limitis hit
66
Do Miller Orr and Baumol take into account transaction costs of switching ebtween current accounts and investments?
YES
67
What does a conservative working capital policy refer to?
Higher amount ivnested in working capital
68
Why is long-term finance more expensive than short-term finance?
It is more expensive as it is riskier for the lender
69
How are most current assets financed with an aggressive working capital funding policy?
Are financed with short-term fudnign rather than long-term funding. Keeps funding costs low but risk higher
70
What does an aggressive working capital funding policy refer to?
An organisation using short-term funding to finance most current assets, such as buffer inventory
71
Assets and liabilities in an aggressive working capital funding policy refer to?
Low values of current assets and high values of current liabilities
72
Is long-term debt finance riskier for the lender than short-term debt finance?
Yes
73
Which working capital strategy is relatively high level of current assets?
Conservative investment strategy
74
Which working capital strategy is relatively low level of current assets?
Aggressive investment strategy
75
Which working capital strategy is relatively large amounts of short-term finance?
Aggressive financing strategy
76
Which working capital strategy is relatively small amounts of short-term finance?
Conservative financing strategy
77
When does net working capital increase?
Only if current assets are increased or current liabilities are decreased
78
Effect of exchanging accounts payable or an overdraft (current liability) for a two-year bank loan or equity (long-term finance) on liabilities?
Decrease current liabilities and increase working capital
79
What indicates that a company is becoming more conservative in its working capital funding policy?
Increase in the ratio of long-term finance to current liabilities
80
What happens when working capital financing policy become more conservative?
An increasing proportion of current assets are funded by long-term sources of finance
81
What does overtrading mean?
A business grows rapidly but in an unsustainable and badly controlled way
82
Effect of overtrading on revenues and costs?
Although revenues and profits may be rising, costs are likely to be out of control, and hence margins falling.
83
Which working capital financing policy would expose a company to the greatest risk of being unable to meet its obligations as they fall due?
Financing permanent current assets with svhort-term debt
84
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?
Decreases them
85
Overtrading effect on overtrading?
It is associated with falling liquidity
86
What is meant by an aggressive approach to financing?
Involves a large proportion of short-term finance which is usually relatively cheap
87
Can a rapid increase in sales mean overtrading?
YES
88
Overtrading's effect on AP turnover period?
May increase it
89
What does overcapitalisation result in?
A relatively high current ratio and is the result of having too much long-term capital
90
Why is long-term finance generally more expensive than short-term finance?
It is riskier for the lender
91
What does a conservative working capital investment policy refer to?
A higher amount invested in working capital
92
What working capital strategy does a conservative investment strategy represent?
Relatively high level of current assets
93
What working capital strategy does an aggressive investment strategy represent?
Relatively low level of current assets
94
What working capital strategy does an aggressive financing strategy represent?
Relatively large amounts of short term finance
95
What working capital strategy does a conservative financing strategy represent?
Relatively small amounts of short term finance
96
What determines the Economic Order Quantity (EOQ)? (Holding)
Holding cost per unit of inventory
97
What determines the Economic Order Quantity (EOQ)? (Placing)
Cost of placing an order for inventory
98
What determines the Economic Order Quantity (EOQ)? (Demand)
Annual demand
99
In inventory management, which of the following will tend to increase the level of safety stock?
Variability of lead-time increases, as safety stock needed to reduce stock-outs will decrease
100
What does EOQ assume about holding costs?
That holding costs depend on the average level of inventory
101
What is true of both EOQ and ROL?
Both are influenced by demand
102
What is least relevant to EOQ?
Safety stock, as EOQ is independent on any decision
103
What is the main objective of JIT?
To reduce the level of inventory and hence holding costs
104
What happens when there's an increase in the cost of holding inventory?
Would lead to a smaller order quantity and hence a reduction in average level of inventory.
105
What is commercial paper?
An unsecured, short-term debt instrument issued by a corporation.
106
What is meant by default risk?
Risk that the security will not be repaid because the issuing entity is insolvent or illiquid
107
What is meant by treasury bills?
Short-term debts issued by the government, which has virtually no risk of being insolvent or illiquid
108
When there's a greater variability in cash flows?
The greater is the spread between the upper and lower cash balance limits
109
What is an assumption of the Baumol model but not of the Miller-Orr model?
Constant usage of cash. Miller-Orr can deal with variability in cash balances
110
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?
Entering into a factoring agreement with a finance company
111
What involves outsourcing the administration of the receivables ledger?
Debt factoring
112
What role would the money market have in a letter of credit arrangement?
Discounting the banker's acceptance
113
What does sale of land increase (ratios)
Would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio
114
Which ratio would most likely be used by management to evaluate short-term liquidity?
Acid test (quick) ratio
115
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?
Increases both, as suppliers are paid more quickly
116
A decrease in holding costs affects the EOQ how?
It increases it
117
No holding of buffer stock a feature of JIT?
Yes
118
Long production runs a feature of JIT?
No
119
Geographical proximity to suppliers a feature of JIT?
Yes
120
High quality raw materials inventory a feature of JIT?
Yes
121
What does invoice discounting normally involve?
Receiving a cash advance from a finance house based on a percentage of the value of selected invoices
122
Will the accounts receivable be sold above their face value in debt factoring?
NO
123
How much cash will factor be prepared to provide in debt factoring?
Around 80% of the value of receivables
124
Main objective of working capital management (liquid)
Ensures company has sufficient liquid resources
125
Main objective of working capital management (profitability)
To increase company's liquidity
126
Benefits of with-recourse factoring for company (reduction)
Reduction in accounts receivable staffing costs
127
Benefits of with-recourse factoring for company (liquidity)
An improvement in short-term liquidity
128
What is a conservative working capital finance approach?
Low risk but expensive
129
Benefit of good working capital management?
Adds to the wealth of shareholders
130
Overtrading effect on inventory?
Increasing levels of inventory
131
Overtrading effect on current liabilities?
Increasing levels of current liabilities
132
What can discounting bills of exchange reduce?
Foreign accounts receivable default risk
133
What is meant by working capital funding strategy for current assets?
Fluctuating current assets should be financed from a short-term source
134
Risk of an aggressive approach?
There is an increased risk of liquidity and cash flow problems
135
Why should sufficient working capital be maintained?
Ensure bills can be paid in time
136
Why is having excessive working capital not ideal?
Working capital (receivables, inventory, payables) do not earn a return
137
What is a conservative approach to working capital investment imply?
Aiming to keep relatively high levels of working capital
138
Does having too much working capital reduce profitability?
Yes
139
What are the two main objectives of working capital management?
Ensure business has sufficient liquid resources and increase profitability
140
Which form of assets give the lowest returns?
Liquid assets
141
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 conservative approach to financing working capital
142
Which approach best aligns to increased risk of liquidity and cash flow problems?
An aggressive approach to financing working capital
143
Is constant demand an assumption in EOQ?
Yes
144
Is zero lead time an assumption in EOQ?
No
145
JIT and level of inventory?
Operates with very low levels of inventory
146
Using EOQ and inventory control system means?
That holding and ordering costs should be the same
147
What is meant by periodic review in inventory control systems?
Ordering inventory at a fixed and regular time interval
148
What costs change when moving from EOQ to JIT?
Total annual inventory holding costs are expected to fall and total annual invnetory ordering costs would be expected to rise
149
Benefits of JIT (levels)
Reduced inventory levels
150
Benefits of JIT (waste)
Less waste
151
Benefits of JIT (production)
Reduced production times
152
Benefits of JIT (quality)
Improved quality of output
153
Do supplier's terms influence credit policy for accounts payable or accounts receivable?
Accounts payable
154
Do competitors' terms influence credit policy for accounts payable or accounts receivable?
Accounts receivable
155
Do risk of irrecoverable debts influence credit policy for accounts payable or accounts receivable?
Accounts receivable
156
Do financing costs for accounts payable or accounts receivable?
Accounts receivable
157
Is customer aware that invoice discounting is being used?
No
158
How do invoice discounters lend money?
Using the business' receivables assets as security
159
What do debt factors effectively purchase?
The receivables assets from the business
160
Is advising existing customers on payment terms AR or AP?
AR
161
Is determining whether to accept cash discounts AR or AP?
AP
162
Is giving credit references to third parties AR or AP?
AR
163
Is investigating potential customers’ creditworthiness AR or AP?
AR
164
Is rapid increase in current assets a symptom of over-trading?
Yes
165
Is increase in inventory holding and accounts receivable collection periods a symptom of over-trading?
Yes
166
Is rapid increase in revenue a symptom of over-trading?
Yes
167
What does increasing shareholder funds suggest?
A business that is aware of an increasing need for extra capital as it expands and that shareholders understand that need
168
What is meant by overtrading?
An increase in business activity without the necessary increase in capitalto support it
169
Both fluctuating and permanent currentassets financed by short-term fund (aggressive or conservative financing strategy)
Aggressive, as short-term funding
170
Delay paying creditors (payables) for aslong as possible (aggressive or conservative financing strategy)
Aggressive, as payables is short-term funding
171
What is a cash forecast?
Estimate of cash receipts and payments for a future period under existing conditions
172
What is done after a cash forecast?
Modify cash flows, raise new capital, or invest surplus funds
173
What is a cash budget?
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
Advantage of centralised treasury function (foreign)
Better foreign currency risk management
175
Advantage of centralised treasury function (borrowing)
Borrowing can be made at more advantageous rates
176
Advantage of centralised treasury function (profits)
Treasury function can be run as a profit centre to raise additional profits
177
When is a long operating cycle more serious (period)
In a period of strong growth
178
When do operating cycles tend to be longer?
In brand new businesses compared to established businesses
179
How to reduce foreign accounts receivable default risk?
Discounting bills of exchange
180
What are company's worried about when expecting to receive foreign currency from FAR?
Will be concerned about the risk of foreign currency depreciating
181
What is the safest way to prevent non-payment for FAR?
If payment was received before shipping
182
When are future insurance premiums higher?
If a foreign customer defaults
183
Is centralised treasury mnanagement more or less responsive?
Less responsive as juggling work for all units at the same time
184
What does a centralised treasury department minimises (hedging)
Hedging transactions and therefore reduce the costs of hedging foreign currency risk
185
How can a centralised treasury department minimise hedging transactions?
By netting off currency and borrowing/deposit requirements and onlyhedging the net exposure rather than every single transaction
186
What must be done for current assets for a working capital funding strategy?
Fluctuating current assets should be financed from a short-term source
187
An aggressive strategy aim to maximise?
Profitability despite the risk of doing so
188
Why is short-term finance generally cheaper than long-term?
As there is less risk for the lender so lender can't demand a high return
189
Why are overdrafts more expensive even though they are short-term?
As they are unsecured
190
What does moderate working capital funding strategies use?
The matching principle
191
How should current assets that are permanently in place be financed?
With long-term funding
192
Advantages of accepting early payment discount for Product Q?
Increase in profit margins, improved business reputation
193
Effect on current ratio if short-term liabilities are replaced with long-term finance?
Current ratio increases
194
Is trade credit long-term or short-term finance?
Short-term
195
Is bank loan long-term or short-term finance?
Long-term
196
What happens to working capital when sales increases?
It increases
197
Effect on profitability with an increase in the cash operating cycle?
It decreases
198
What is overtrading known as?
Under-capitalisation
199
Why does JIT require close integration with suppliers?
Aim would be to eliminate the holding of inventory the operating cycle shortens but the risk of stock-outs rises
200
Characteristics of an aggressive policy for current assets?
Holding low levels of current assets
201
Are current liabilities higher than current assets in an aggressive financing policy?
Yes
202
What does factoring with recourse mean?
If a customer fails to pay their invoice the company that made the sale
203
What can expertise of a factor increase?
The efficiency of trade receivables management for a company
204
What does EOQ model assume?
Holding costs depend on the average inventory level
205
Is EOQ calculation unaffected by buffer inventory?
Yes
206
Does holding buffer inventory increase costs?
Increases inventory holding costs to manage stockout risks
207
What is analysis of yield curve relate to?
Relates to the relationship between short and long-term interest rates
208
What is a certificate of deposit an example of?
A money market instrument
209
Characteristics of commercial paper?
Short-term low risk debt
210
How are treasury bills bought and sold?
On a discount basis
211
What does efficient markets hypothesis test?
The pricing efficiency of the stock market
212
If market is weak-form efficient and pricing?
Prices already reflect all historic data and prices changes cannot be predicted by analysing historic price trends
213
What can be done to reduce foreign accounts receivable default risk?
DIscounting bills of exchange
214
What does a centralised treasury department minimise?
The number of hedging transactions, reducing the costs of hedging foreign currency risk
215
How should fluctuating current assets be financed?
From a short-term source
216
How should permanent current assets be financed according to the matching principle?
From a long-term source
