Assignment # 4 Ch 22

True/False
Indicate whether the statement is true or false.

____ 1. Net working capital, defined as current assets minus current liabilities, is also equal to the current ratio.
____ 2. An increase in a current asset must be accompanied by a corresponding increase in a current liability.
____ 3. The cash conversion cycle (CCC) combines three factors, the inventory conversion period, the receivables
collection period, and the payables deferral period, and its purpose is to show how long a firm must finance
its operating working capital. Other things held constant, the shorter the CCC, the more effective the firm's
working capital management.
____ 4. Shorter-term cash budgets, in general, are used for actual cash control while longer-term cash budgets are
used for planning purposes.
____ 5. Firms hold cash balances in order to complete transactions that are necessary in business operations and as
compensation to banks for providing loans and services.
____ 6. Lockbox arrangements are one way for a firm to speed up collection of payments from customers.
____ 7. The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and
receiving goods against the cost of carrying those goods, while simultaneously meeting the firm's policy with
respect to avoiding running short of stock and thus disrupting production schedules or losing sales.
____ 8. Determining a firm's optimal investment in net operating working capital and how that investment is financed
are elements of working capital policy.
____ 9. Permanent net operating working capital reflects the fact that net operating working capital does not shrink to
zero even when a business is at its seasonal or cyclical low. Thus, permanent net operating working capital
represents a minimum level of net operating working capital that must be financed.
____ 10. One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly
than long-term credit.
____ 11. A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of
the loan. More often than not, the bank will sell the note in the open market to a permanent investor like a life
insurance company or pension fund.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 12. Other things held constant, which of the following will cause an increase in net working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.
____ 13. Helena Furnishings wants to reduce its cash conversion cycle sharply. Which of the following actions should
it take?
a. The company increases its average inventory without increasing its sales.
b. The company reduces its DSO.
c. The company starts paying its bills sooner, which reduces its average accounts payable
 without reducing its sales.
d. The company increases its DSO.
e. The company sells an issue of long-term bonds and uses the proceeds to buy back some of
its common stock.
____ 14. Which of the following actions would likely shorten the length of the cash conversion cycle?
a. Adopting a new inventory system that reduces the inventory conversion period.
b. Reducing the average days sales outstanding (DSO) on its accounts receivable.
c. Reducing the amount of time the company takes to pay its suppliers.
d. Statements a and b are correct.
e. All of the statements above are correct.
____ 15. Ski Lifts Inc. is in a highly seasonal business, and the following summary balance sheet data show its assets
and liabilities at peak and off-peak seasons (in thousands of dollars):

Peak Off-peak
Cash $ 50 $ 30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
Total assets $690 $620

Spontaneous liabilities $ 30 $ 10
Short-term bank debt 50 0
Long-term debt 300 300
Common equity 310 310
Total claims $690 $620

From this data we may conclude that

a. Ski Lifts' working capital financing policy calls for exactly matching asset and liability
maturities.
b. Ski Lifts' working capital financing policy is relatively aggressive; that is, the company
finances some of its permanent assets with short-term discretionary debt.
c. Ski Lifts follows a relatively conservative approach to working capital financing; that is,
some of its short-term needs are met by permanent capital.
d. without income statement data, we cannot determine the aggressiveness or conservatism
of the company's working capital financing policy.
e. statements a and c are correct.
____ 16. Carroll & King Corporation has $5 million of inventory and $2 million of accounts receivable. Its average
daily sales are $120,000. The company's payables deferral period (accounts payable divided by daily
purchases) is 30 days. What is C&K's cash conversion cycle?
a. 24
b. 26
c. 27
d. 28
e. 30
____ 17. Bello Inc. had sales of $2,500,000 per year (all credit,) and its days sales outstanding was DSO = 35 days.
What was its average amount of accounts receivable outstanding, based on a 365-day year?
a. $239,726
b. $251,712
c. $264,298
 d. $277,513
e. $291,388
____ 18. Miletkov Company's total assets fluctuate between $320,000 and $410,000, while its fixed assets remain
constant at $260,000. If the firm follows a maturity matching, or moderate, working capital financing policy,
what is the likely level of its long-term debt and equity financing?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000
____ 19. On average, Bragg Inc. has sales of $2,000,000 per month. It keeps inventory equal to 50% of its monthly
sales on hand at all times. Based on using a 365-day year, what is the inventory conversion period?
a. 11.7
b. 13.0
c. 14.4
d. 15.2
e. 16.7
____ 20. Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000; and its average accounts
receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days, and it pays on time. The
firm is searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels
while lowering inventory by $4,000,000 and accounts receivable by $2,000,000, by how many days would the
cash conversion cycle be changed? Use a 365-day year.
a. –27.4
b. –28.7
c. –30.2
d. –31.7
e. –33.3
____ 21. You were recently hired as CFO to improve the performance of Dennis Systems, which is highly profitable
but has been experiencing cash shortages due to its high rate of growth. As one part of your analysis, you
want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what
is your estimate of the firm's present cash conversion cycle?

Average inventory: $120,000

Annual sales: $600,000
Average accounts receivable: $160,000
Average accounts payable: $25,000
Total annual purchases: $365,000
Buy on net 30 days, no discounts: 30
Sell on net 50 days, no discounts: 50

a. 118.4
b. 124.6
c. 131.2
d. 138.1
e. 145.3
____ 22. Ferson Inc. has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. On average, the company
has $12,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten
its cash conversion cycle, which is calculated on a 365-day basis. Its CFO has proposed new policies that
would result in a 20% reduction in both average inventories and accounts receivables. She also anticipates
that these policies would reduce sales by 10%, while accounts payable would remain unchanged. What effect
would these policies have on the company's cash conversion cycle? Round to the nearest whole day.
a. –40 days
b. –22 days
c. –13 days
d. +22 days
e. +40 days
____ 23. Bello Corp. has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts
receivable of $10,008,000. The company makes all purchases on credit and has always paid on the 30th day.
However, it now plans to take full advantage of trade credit and pay its suppliers on the 40th day. The CFO
also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000
and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a
365-day year?
a. –14.0 days
b. –18.8 days
c. –25.6 days
d. –28.0 days
e. –38.0 days
____ 24. Nagel Corporation's budgeted monthly sales are $5,000, and they are constant from month to month. Its
customers pay as follows: 40% pay in the first month and take the 2% discount, while the remaining 60% pay
in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next
month's sales are constant at 50% of projected sales for the next month. "Other payments," which include
payments for wages, rent, and taxes, are 25% of sales for the month. Construct a cash budget for a typical
month and calculate the average cash gain or loss during the month.
a. $1,092
b. $1,150
c. $1,210
d. $1,271
e. $1,334
____ 25. Wintoki Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear. The
firm also receives checks in the amount of $17,000 per day, and it takes 3 days for these checks to be
deposited and cleared. What is the firm's net float, in dollars?
a. $20,577
b. $21,660
c. $22,800
d. $24,000
e. $25,200
____ 26. Margetis Inc. carries an average inventory of $1,000,000. Its annual sales are $10 million, and its receivables
conversion period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days,
and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day
year. He believes he can reduce the average inventory to $863,000 with no affect on sales. By how much must
the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in the cash conversion
cycle?
a. $0
b. $101,900
c. $136,986
d. $333,520
e. $1,000,000