M3-Working Capital Metrics Flashcards
Working Capital Policy is deemed to be more conservative as an increasing portion of an organization’s long-term assets, permanent current assets, and temporary current assets are funded by long-term financing. (true or false)
true
With no other information, an increase in current assets would indicate that a growing percentage of current assets are financed by non current liabilities and that, nominally, the absolute amount of working capital and the current ratio is improving.
Net working capital is the difference between current assets and current liabilities. (true or false)
true
Assets = liabilities + owners equity
The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the greatest risk of being unable to meet the firm’s maturing obligations. (true or false)
true
The use of long-term debt financing produces the smallest risk of being unable to meet maturing obligations.
Working Capital (WC) increase only if current assets are increased or current liabilities are decreased. Exchanging accounts payable (current liability) for a two-year note payable (long-term liability) would decrease current liabilities and increase working capital. (true or false)
true
The acid test ratio evaluates short-term liquidity. (true or false)
true
Return on total assets evaluates:
the profitability of a firm
Accounts Receivable Turnover is an activity ratio used to evaluate:
the efficiency of a firm.
A higher current ratio indicates (more or less) liquidity
more
The cash conversion cycle is equal to the inventory conversion period plus the receivable collection period less the payables deferral period. It can be though of as how long it takes for a company to buy inventory on credit from a vendor, sell that inventory on credit, collect cash for the sale, and use the proceeds to pay the vendor for the purchase. (true or false)
true
Appropriate working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset. (true or false)
true
Return maximization seeks to obtain the optimal return rate by asset utilization. (true or false)
true
Financial leverage is the amount of debt used to finance an asset. (true or false)
true
Operating leverage is the degree that fixed costs are used in the production process. (true or false)
true
Determining the appropriate level of working capital for a firm requires offsetting the benefit of current assets and current liabilities against the probability of technical insolvency. (true or false)
true
As a company becomes more conservative in its working capital policy, it would tend to have an increase in the ratio of current assets to units of output. (true or false)
true
Acid test ratio would tend to increase with conservatism.
Marketable securities investments would tend to increase while common stock investments would tend to decrease.
Permanent working capital would tend to increase
