Lesson 4.5: Working Capital Management

Question 1

refers to company’s investment in short term asset such as cash,
inventory, short-term marketable securities, and account receivable.

Answer 1

working capital

Question 2

refers to the difference between the firm’s current assets and
current liabilities.

Answer 2

net working capital

Question 3

If the firm’s current assets exceed its current liabilities, the firm
has a

Answer 3

positive working capital

Question 4

if current liabilities exceed
current assets, the firm has a

Answer 4

negative working capital

Question 5

specifically refers to the efficient management of
the firm’s current assets (cash, receivables, and inventory) and current liabilities
(short-term payables).

Answer 5

working capital management

Question 6

involves the maintenance of a cash and marketable
securities investment level, which will enable the company to meet its cash
requirements and at the same time optimize the income on idle funds.

Answer 6

cash management

Question 7

Although cash has generally considered a non-earning asset, business firms must
hold cash for the following reasons:

Answer 7

transaction; precautionary; speculative; contractual MOTIVE

Question 8

cash needed to facilitate the normal transactions of the
business, that is, to carry out its purchases and sales activities.

Answer 8

transaction motive

Question 9

Cash may held beyond its normal operating requirement
level in order to provide for a buffer against contingencies such as unexpected
slow-down in accounts receivable collection, strike or increase in cash needs
beyond management’s original projections.

Answer 9

precautionary motive

Question 10

cash held ready for profit making or investment
opportunities that may come up such as a block of raw materials inventory offered
at discounted prices or a merger proposal.

Answer 10

speculative motive

Question 11

A company may be required by a bank to maintain a certain
compensating balance in its demand deposit account as a condition of a loan
extended to it

Answer 11

contractual motive

Question 12

a metric that expresses the number of days it takes for a company to convert its inventory into cash flows from sales.

Answer 12

cash conversion cycle

Question 13

The
operating cycle of a firm is mainly composed of two current asset categories which are

Answer 13

inventories and accounts receivable

Question 14

It measures as the sum of the Average Age of
Inventory and Average Collection Period.

Answer 14

operating cycle

Question 15

refers to the
time that lapsed when a good manufactured and eventually sold.

Answer 15

average age of inventory

Question 16

refers to the time when the sale made and
collected.

Answer 16

average collection period

Question 17

formula for operating cycle

Answer 17

operating cycle = average age of inventory + average collection period

Question 18

average collection period and average age of inventory is measured in

Answer 18

days

Question 19

reduces the number of days a
firm’s resource has tied up to its operating cycle.

Answer 19

accounts payable

Question 20

cash conversion cycle formula

Answer 20

cash conversion cycle = operating cycle - average payment period

Question 21

the time it takes for the firm to pay its accounts
payable expressed in number of days.

Answer 21

average payment period

Question 22

The objective in managing inventory is to

Answer 22

convert it as quickly as possible to cash without losing sales due to stock outs

Question 23

Therefore, the
financial manager plays a crucial role in overseeing that the firm maintains an

Answer 23

appropriate quantity of inventory

Question 24

types of inventory in a manufacturing company

Answer 24

raw materials; work in process; finished goods

Question 25

these are purchased materials not yet put into
production

Answer 25

raw materials

Question 26

these are goods and labor put into production but
not finished.

Answer 26

work in process

Question 27

these are goods put into production and finished.
These are ready to be sold.

Answer 27

finished goods

Question 28

common technique in inventory management

Answer 28

ABC inventory system/ABC analysis

Question 29

A in the ABC inventory system refers to

Answer 29

high value items that should be safeguarded the most

Question 30

B in the ABC inventory system refers to

Answer 30

average-cost items that should be safeguarded more than C items

Question 31

C in the ABC inventory system refers to

Answer 31

low-cost-items that are the least safeguarded

Question 32

represents assets of the entity that expected
to be collected and thus converted to cash.

Answer 32

accounts receivable (management)

Question 33

sound accounts receivable management practices
would form three parts

Answer 33

credit selection; credit terms; credit monitoring

Question 34

A firm would generally want to collect
its receivables

Answer 34

as quickly as possible

Question 35

The applicant’s record of meeting its past obligations has judged.

Answer 35

character

Question 36

However, if the applicant does not have any credit history, he or she may be
required to have a

Answer 36

co-maker

Question 37

another person who signs the loan and
assumes equal responsibility for repayment.

Answer 37

co-maker

Question 38

This emphasizes the customer’s ability to repay its obligations in
reference to its current financial position or standing.

Answer 38

capacity

Question 39

It determines whether the
customer has sufficient resources or sources of funds that it can use to settle
obligation

Answer 39

capacity

Question 40

The applicant’s net worth which can be arrived at by deducting total
liabilities from total assets.

Answer 40

capital

Question 41

how can capital in the 5C’s of credit be calculated

Answer 41

deducting total liabilities from total assets

Question 42

The amount of assets the customer has that could serve as a security
in the event that the obligation is not paid.

Answer 42

collateral

Question 43

This includes current economic and industry conditions that might
affect the customer’s ability to repay its obligations.

Answer 43

condition

Question 44

allow the firm to carefully assess the
customer’s ability to repay its obligations along with the level of risk that the firm
will be subjected to once it decides to grant credit to the customer.

Answer 44

5C’s of credit

Question 45

Another used in granting credit to customers is through

Answer 45

credit scoring

Question 46

applies statistically derived weights to a credit applicant’s
scores on key financial and credit characteristics to predict whether he or she will
pay the requested credit on time.

Answer 46

credit scoring

Question 47

the credit score is compared to a

Answer 47

pre-determined standard

Question 48

This method is an
inexpensive way to obtain credit ratings for customers.

Answer 48

credit scoring

Question 49

This approach aligns the duration of assets with their financing sources.

Answer 49

maturity-matching policies

Question 50

in the maturity-matching policy, short-term assets are funded with

Answer 50

short-term liabilities

Question 51

in the maturity-matching policy, long-term assets are funded by

Answer 51

long-term liabilities

Question 52

In this strategy, a significant portion of both short-term and long-term assets is financed using short-term liabilities. This reduces financing costs but increases risk.

Answer 52

aggressive policy

Question 53

focuses on minimizing risks by maintaining high levels of liquidity and low levels of debt.

Answer 53

conservative policy