1.

Short-term financing plans with high liquidity have:

A. high return and high risk B. moderate return and moderate risk
C. low profit and low risk D. none of the above

2. The length of time between payment for inventory and the collection of cash is referred to as A.
payables deferral period. B. receivables conversion period
C. operating cycle D. cash conversion cycle

3. The transaction motive for holding cash is for:

A. a safety cushion B. daily operating requirements
C. compensating balance requirements. D. . none of the above

4. The average length of time a peso is tied up in current asset is called the:

A. net working capital. C. receivables conversion period.

B. inventory conversion period. D. cash conversion period.

5. The difference between the cash balance on the firm's books and the balance shown on t bank
statement is called:
A. the compensating balance. B. float
C. a safety cushion D. none of the above

6. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.

7. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory B. opportunity cost of capital
C. aggregate of carrying and shortage costs. D. amount of spoilage or pilferage

8. As a firm's cash conversion cycle increases, the firm:

A. becomes less profitable. B. increases its investment in working capital C. reduces

its accounts payable period. D. incurs more shortage costs

9. Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

10. The objectives of cash management include to:

a. earn a return.
b. hold cash to a minimum consistent with efficient operation.
c. ensure adequate liquidity.
d. Both b & c.

11. The cash conversion cycle measures the time:

a. between the creation of receivables and their collection.
b. it takes for inventory to be turned into product and sold.
c. between payment for inventory and collection of cash for its subsequent sale as product.
d. for a check to clear the banking system.

12. Net working capital is defined as:

a. current assets minus current liabilities.
b. working capital minus short-term debt.
c. current assets plus current liabilities.
d. All of the above

13. An effective program of working capital management requires that:

a. the firm run with the absolute minimum in each current asset account.
b. a series of cost/benefit tradeoffs be considered because running a business is easier with more
working capital than with less, but holding working capital costs money.
c. large inventories be maintained to adequately service customers.
d. credit can be easily granted to customers to encourage higher sales.

PART II.

14. Give the formula of ECQ or the Baumol Model of determining the optimal cash balance.

15. _________ are the variable current assets that move in line with seasonal fluctuations in sales. These
assets represent the sudden increase in accounts receivable, cash and inventory due to spike in sales.

16-18. Enumerate the 3 Working Capital Financing Policies

19. __________the type of float where the time period between when a payee receives a payment from
the payer and deposits it.

20. ___________the need to hold cash for day-to-day transactions like buying goods and services.