Solution of Chapter No: 19 Section –Two

Working Capital Management and Short Term Planning

Quiz No: 01 Working Capital Management
S.N Transaction Impact on Cash Impact on Net Working
Capital (NWC)
(a) Paying out a $2 million cash $2 million decrease $2 million decrease
dividend.
(b) A customer paying a $2,500 bill $2,500 increase Unchanged
resulting from a previous sale.
(c) Paying $5,000 previously owed to $5,000 decrease Unchanged
one of its suppliers.
(d) Borrowing $1 million long-term Unchanged $1 million increase
and investing the proceeds in
inventory.
(e) Borrowing $1 million short-term Unchanged Unchanged
and investing the proceeds in
inventory.
(f) Selling $5 million of marketable $5 million increase Unchanged
securities for cash.
Quiz No: 03 Sources and Uses of Cash
a. Inventories of raw materials, work in process, and finished goods
increase and cash decreases (use of cash).
b. Accounts receivable increase (use of cash).
c. Decrease in fixed assets (land), increase in cash (source of cash), and
decrease in shareholders‟ equity when the loss on the land is recognized.
d. Shareholders‟ equity decreases and cash decreases (use of cash).
e. Retained earnings and cash decrease when the dividend is paid (use of
cash).
f. Long-term debt increases (source of cash), short-term debt decreases
(use of cash).
Quiz No: 04 Cash Conversion Cycle
Remember that
Cash Conversion Cycle = Inventory Period + Receivables Period – Accounts
Payable Period
a. Lower inventory levels will reduce the inventory period and therefore the
cash conversion cycle.
b. The accounts payable period will fall, which will lengthen the cash
conversion cycle.
c. The accounts receivable period will fall, which will shorten the cash
conversion cycle.
d. The accounts receivable period will rise (since customers pay their bills
more slowly), which will lengthen the cash conversion cycle.
Quiz No: 05 Managing Working Capital
The firm can use its new system to maintain lower inventory levels. This will
reduce the inventory period and therefore the cash conversion cycle, and will
reduce net working capital as well.
Quiz No: 06 Cash Conversion Cycle
Accounts Receivable Period = Average Accounts Receivables/Sales Per Day
= (100+150)/2 ÷ 5000/365
= 8 Days
Inventory Period = Average Inventory ÷ Cost of Goods Sold/365
= (500+600)/2 ÷ 4200/365
= 47.8 Days
Accounts Payable Period = Average Accounts Payables ÷ C.G.S/365
= (250 +290)/2 ÷ 4200/365
 = 23.5 Days
Cash Conversion Cycle = Inventory Period + Accounts Receivables period –
Accounts payable period
= 47.8 + 8 – 23.5
= 32.3 Days

Quiz No: 07 Effects on Cash Conversion Cycle

As we know that;
Cash Conversion Cycle = Inventory Period + Accounts Receivables period – Accounts payable period
a. The discount should induce some customers to pay cash. Accounts
receivable, the receivables period, and the cash conversion cycle will fall.
b. Lower inventory turnover implies more days in inventory. The cash
conversion cycle increases.
c. If the firm produces goods more quickly, inventory levels corresponding
to work in process will fall. Therefore, the inventory period and the cash
conversion cycle fall.
d. If the accounts payable period falls, the cash conversion cycle will
increase.
e. Because the goods are already ordered, inventory of finished product will
fall relative to sales. Therefore the inventory period and the cash
conversion cycle fall.
f. Inventory increases imply a longer inventory period and cash conversion
cycle.