Chapter 3 - Working capital investment

Question 1

Does conservative policy prioritise profitability or liquidity?

Answer 1

Profitability - holds more stock to sell more and gives customers more favourable credit terms

Question 2

Does aggressive policy prioritise profitability or liquidity?

Answer 2

Liquidity - minimal receivables and take as long as possible to pay creditors

Question 3

What are the characteristics of a conservative working capital policy?

Answer 3

• High receivables
• High inventory
• Low payables
• Maximise net working capital

Question 4

What are the characteristics of an aggressive working capital policy?

Answer 4

• Low receivables
• Low inventory
• High payables
• Minimise net working capital

Question 5

What are the signs of overtrading?

Answer 5

LIARS - the below increase

• Liabilities current
• Inventory days
• Asset ratios
• Receivables
• Sales

Question 6

What is overtrading also known as?

Answer 6

Undercapitalisation

Question 7

What are the assumptions of the EOQ model?

Answer 7

• Constant demand
• Zero lead times
• No transaction costs
• That we know Co and Ch

Question 8

What are the methods to manage foreign accounts receivable?

Answer 8

• Bill of exchange
• Letter of credit
• Invoice discounting
• Debt factor

Question 9

A conservative policy for financing working capital is one where short-term finance is used to fund:

Answer 9

All of the fluctuating current assets, none of the permanent current assets

Question 10

An aggressive policy for financing working capital is one where short term finance is used to fund:

Answer 10

All of the fluctuating current assets, 50% of the permanent current assets