Chapter 9

Question 1

Net working capital

Answer 1

Current assets minus current liabilities

Question 2

Accounts

Answer 2

Items accounted for on a balance sheet, income statement or cash flow statement

Question 3

Accounts payable

Answer 3

Current debts arising from the purchases of goods and services

Question 4

Marketable securities

Answer 4

Short-term interest-earning financial claims that can be quickly converted to cash without any significant loss of value

Question 5

Transactions move

Answer 5

Maintaining additional cash balances to pay for predictable day-to-day cash needs

Question 6

Safety motive

Answer 6

Maintaining additional cash balances for unforeseen day-to-day cash needs

Question 7

Speculative motive

Answer 7

Maintaining additional cash balances in interest-earning marketable securities in order to take advantage of unexpected investment opportunities

Question 8

Cash management

Answer 8

The management of cash-on-hand, bank balances and marketable securities

Question 9

Cash receipts

Answer 9

Cash inflows received

Question 10

Cash disbursements

Answer 10

Cash payments

Question 11

Operating cash flows

Answer 11

Cash inflows received and outflows incurred as a result of the firms day-to-day operating activities

Question 12

Financing cash flows

Answer 12

Cash inflows received and cash outflows incurred as part of the firms financing activities

Question 13

Goods and services tax (GST)

Answer 13

A type of value-added tax collected by suppliers of goods and services on behalf of the government

Question 14

Credit policy

Answer 14

Setting standards and guidelines that govern the management of accounts receivable. Consists of credit standards, credit terms and collection policy

Question 15

Credit standards

Answer 15

Criteria used to evaluate the creditworthiness of customers who are seeking to purchase goods or services on credit

Question 16

Credit terms

Answer 16

The time-frame requirements for customer repayments of trade credit

Question 17

Collection policy

Answer 17

Procedures adopted to collect accounts receivable

Question 18

Raw materials inventory

Answer 18

Unprocessed materials inventory held while awaiting production

Question 19

Work-in-process

Answer 19

Partly completed goods that are still in production

Question 20

Finished goods inventory

Answer 20

Fully completed goods available for sale

Question 21

Economic order quantity (EOQ)

Answer 21

The optimal order quantity that minimises total holding and ordering costs

Question 22

Just-in-time system

Answer 22

An arrangement with suppliers for inventory to be delivered at the time when it is needed for production

Question 23

Trade credit

Answer 23

The purchase of goods or services on account, for payment at a later date

Question 24

Explicit interest cost

Answer 24

A stated interest rate

Question 25

Interest-free period

Answer 25

The period over which a supplier will extend credit to a customer with no explicit or implicit interest charge

Question 26

Credit period

Answer 26

The period ending with the final date for payment of an invoice

Question 27

Implicit interest cost

Answer 27

An implied, but instated interest charge

Question 28

Cash conversion cycle (CCC)

Answer 28

Average length of time that cash is tied up in net working capital. Calculated as AAI + ACP - APP

Question 29

Average payment period (APP)

Answer 29

Average length of time to pay for materials and labour consumed

Question 30

Average collection period (ACP)

Answer 30

Average length of time between the sale of inventory and the receipt of cash for payment from the customer

Question 31

Average age of inventory (AAI)

Answer 31

Average length of time between the purchase and sale of inventory

Question 32

Accounting system

Answer 32

A method of recording financial transactions