True / False (5 Questions @ 4pts each)
Please enter ‘T’ or ‘F’ in Column B
1. Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.
2. The aggressive financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds and uses short-term financing only for emergencies or unexpected outflows.
3. In general, the greater a firm’s current assets relative to its short-term obligations, the better able it will be to pay its bills as they come due.
4. Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.
5. Factoring accounts receivable is a relatively inexpensive source of unsecured short-term funds.
Wk4 Individual Assignment
Multiple Choice (10 Questions @ 5 pts each)
1. ________ involves the sale of accounts receivable.
A-A trust receipt loan
B-Pledging of accounts receivable
D-A warehouse arrangement
2. In working capital management, risk is measured by the probability that a firm will become
C-unable to meet long-term obligations
3. ________ are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages.
4. The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow.
5. Financing that matures in one year or less and has specific assets pledged as collateral is called
A-unsecured short-term financing
B-secured short-term financing
D-none of the above
6. A(n) ________ in current liabilities ________ net working capital, thereby ________ the risk of technical insolvency.
A-increase; decreases; increasing
B-increase; increases; reducing
C-decrease; decreases; reducing
D-decrease; increases; increasing
7. Short-term loans that businesses obtain from banks and through commercial paper are
A-spontaneous and secured
B-negotiated and secured
C-spontaneous and unsecured
D-negotiated and unsecured
8. The difference between the number of days resources are tied up in the operating cycle and the number of days the firm can use spontaneous financing before payment is made is the
A-average payment period
B-average age of inventory
C-cash conversion cycle
D-average collection period
9. The philosophy of the ________ is that the firm would have only work-in-process inventory.
C-basic economic order quantity system
D-materials requirement planning system
10. Loans on which the interest is paid in advance are often called
Wk4 Individual Assignment
Problems (2 Questions)
1. Tony’s TV Shop is analyzing the performance of its cash management. On average, the firm holds inventory 75 days, pays its suppliers in 30 days, and collects its receivables in 20 days. The firm has a current annual outlay of $2,450,000 on operating cycle investments. Tony’s currently pays 12 percent for its negotiated financing. (Assume a 360 day year.)
2. Alpha Company needs to borrow $75,000 from a local bank using its accounts receivable to secure the loan. The bank’s policy is to accept as collateral any accounts that are normally paid within 30 days of the end of the credit period, as long as the average age of the account is not greater than the customer’s average payment period. Alpha’s accounts receivable, their average ages, and the average payment period for each customer are shown in the following table. Assume that Alpha allows customers a credit period of 30 days.