Working Capital

Question 1

Production cycle

Answer 1

the time needed to convert raw materials into finished goods. The longer the duration of this cycle, the higher the level of working capital that would be expected to be devoted to the process.

Question 2

What is float?

Answer 2

the length of time between the writing of a check and the actual transfer of the funds

Question 3

What is disbursement float

Answer 3

The time between the writing of a check by a firm and the removal of the funds from the firms account. Efficient firms will seek to increase disbursement float

Question 4

What is receipt float?

Answer 4

The time between the writing of a check by a customer and when those funds become available to the party to which the check was made. Efficient firms seek to decrease receipt float

Question 5

Cash conversion cycle

Answer 5

the time between paying cash for raw materials and collecting cash from the sale of products made with those raw materials

Question 6

Remote disbursing

Answer 6

involves paying bills with checks drawn on accounts with banks in remote locations. Used to increase payment float

Question 7

Concentration banking

Answer 7

Funds collected in multiple local banks are transferred regualrly and automatically to the firms primary bank. Used to accelerate the flow of cash to a firms principal bank. can be used to facilitate the investment of excess cash

Question 8

Depository transfer checks

Answer 8

used to accelerate transfer of a firms cash between its accounts at different financial institutions

Question 9

Draft payment

Answer 9

Legal instrument called a draft that is drawn on an account of a bank and is guaranteed by the bank. Ex. bank drafts, money orders, certified checks.

Question 10

Lock box systems

Answer 10

Customers remit payments to a firms post office box where they are collected and then processed and deposited by a firms bank. May reduce float by several days.

Question 11

In selecting short term investments for excess cash, a firm should be concerned with….

Answer 11

Safety of principal
Price stability of the investment instrument
Marketability (Ability to readily convert the investment to cash without undue cost)

Question 12

What type of investment security is expected to have the highest yield

Answer 12

Corporate bonds - bc they are more risky than US treasury bills and federal agency securities, and since the interest they pay is taxable, they would be expected to have the highest yield

Question 13

Sharpe ratio

Answer 13

Risk/reward ratio.

the mean return/standard deviation. The higher the ratio, the greater the reward per unit of risk.

Question 14

Liquidity risk

Answer 14

the risk assoc with the ability to sell an investment in a short period of time without having to make significant price concessions

Question 15

Treasury Bills

Answer 15

debt obligations of the US gov.
Maturity of one year or less.
Backed by the full faith and credit of the US gov.
Considered the safest securities available to the us investor.
Highest desirable form of temp investment

Question 16

Commercial paper

Answer 16

form of unsecured, short term promissory note. can only be issued by large firms with high credit ratings

Question 17

Bankers’ acceptances

Answer 17

drafts that are frequently used in financing of foreign transactions

Question 18

Repurchase agreement

Answer 18

provides for the seller to repurchase the instrument with no loss in value, for as short a period as one day

Question 19

What is the overall objective of accounts receivable management

Answer 19

to maximize profits, not to minimize losses.

Question 20

What type of inventory management approaches seeks to minimize total inventory costs by considering both the restocking cost and the carrying costs?

Answer 20

Economic order quantity - seeks to determine the order size that will minimize total inventory cost (both order cost and carrying costs)

Question 21

Activity based costing

Answer 21

is a system of costing that assigns cost to activities performed in the org and then to products according to their use of the various activities

Question 22

Economic order quantity formula

Answer 22

the absolute value of ((2 x annual demand x cost per order) / carrying cost per unit)

Question 23

Materials requirement planning

Answer 23

approach to manufacturing and inventory mgmt focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as WIP and raw materials

Question 24

What factors are included in deciding when to reorder inventory?

Answer 24

function of the minimum level of inv to be maintained (referred to as safety stock) and the length of time it takes to receive inv after it is ordered (lead time or delivery-time stock) 
Reorder point = safety stock + delivery-time stock

Question 25

Hedging principle of financing

Answer 25

short term liabilities should be used to finance short term assets