Financial Management

Question 1

What are the five main functions of financial management?

Answer 1

Financing
Capital Budgeting
Financial Management
Corporate Governance
Risk Management

Question 2

What is the formula for the cash conversion cycle?

Answer 2

CCC = ICP + RCP - PDP

Measures number of days from when a business pays for its inputs to when business collect cash from the sales

Question 3

What is the formula for the inventory conversion period?

Answer 3

ICP = Average inventory / COGS per day

Average number of days required to convert inventory to sales

Question 4

What is the formula for the accounts receivable collection period?

Answer 4

RCP = Average A/R / Average credit sales per day

Average number of days required to collect A/R

Question 5

What is the formula for the accounts payable deferral period?

Answer 5

PDP = Average A/P / Purchases per day

Average number of days between buying inventory and paying for that inventory

Question 6

What are the maturities for Treasury securities?

Answer 6

Treasury bill = under 1 year
Treasury note = 1 - 10 years
Treasury bond = over 10 years

Question 7

What is the formula for the reorder point?

Answer 7

Average daily demand
x Average lead time
= Reorder point without safety stock
\+ Safety stock
= Reorder point with safety stock

Question 8

What is the formula for the economic order quantity?

Answer 8

EOQ = square root of 2 x A x P / S

A = annual usage of inventory
P = cost of placing an order
S = cost of storing inventory

Question 9

When can Just-In-Time be used effectively?

Answer 9

When costs of storing inventory are high
Lead times are low
Good relationships with suppliers
Costs per purchase order are low

Question 10

What is the backlash approach?

Answer 10

All manufacturing costs are charged to COGS
Company determines if inventory is left at end of period
Costs moved from COGS to inventory if needed

Question 11

What are the four reasons to hold cash?

Answer 11

Meet day to day needs
Compensating balances
Precautionary measures for unexpected
Take advantage of opportunities

Question 12

What are the four components of credit policy?

Answer 12

Credit period
Credit standards
Collection policy
Discount

Question 13

What is the formula for the annual cost of carrying inventory?

Answer 13

Average Inventory
x Unit cost
x Cost of capital