Working capital is equal to the firm’s current assets, whereas net operating working capital is

equal to current assets less the difference between current liabilities and notes payable.
TRUE
1. A firm carries relatively large amounts of cash, marketable securities, and inventories, and a
liberal credit policy results in a high level of receivables. Which of the following current asset
investment policies best reflects this firm’s policy? RELAXED
2. Permanent current assets are the current assets a firm must have at the low point of its
seasonal or cyclical sales, whereas temporary current assets are the extra assets that must
be added to meet peak seasonal or cyclical demand TRUE
3. If a firm finances its permanent current assets with long-term debt and equity, and finances
its temporary current assets with short-term debt, what type of financing policy would it
have? MATURITY MATCHING

4. The Cash Conversion Cycle (CCC) is equal to the inventory conversion period, plus the
average collection period, plus the payables deferral period. FALSE

5. Suppose a firm does the following: (1) Switches from manufacturing the goods it sells to
buying and then reselling them, (2) changes from giving customers 60 days to pay to 30 days,
and (3) begins paying its own suppliers in 60 rather than 30 days. What would happen to its
CCC? DECREASE

6. The cash budget, like other budgets, sets a limit on how much the firm can spend during a
specified time period. For example, management might limit each of its divisions to spending
no more than $1 million. FALSE

7. The cash budget shows, often on a monthly basis, expected collections from sales, the cash
payments that must be made during the period, and the projected cash flow for the period.
Cumulative cash flow is determined, and the target cash balance is subtracted from the
cumulative cash flow to determine the firm’s need for financing or surplus cash available for
investment. TRUE

8. Depreciation is a major source of cash, so it shows up on the cash budget as a cash inflow.
FALSE

9. Currency and demand deposits are defined to be "cash." Also, very safe, short-term, highly
liquid marketable securities are sometimes included when people discuss a firm’s "cash
account." TRUE

10. Firms often hold short-term marketable securities for liquidity purposes, selling them when
they need to write checks or buying them when cash in the bank builds up. In addition,
firms may also hold short-term marketable securities after they sell stock or bond issues,
pending investment in plant, equipment, working capital or other assets. TRUE

11. What effect has the development of credit and debit cards had on firms’ cash balances?
DECREASE REQUIRED CASH BALANCE

12. In financial parlance, a lockbox is a box that is similar to a safe, and firms use them to store
currency overnight and on weekends. FALSE
13. There have been huge improvements in transportation services in recent years. What effect
have these changes had on firms’ inventory holdings as measured by the ratio of inventories
to sales? DECREASED INVENTORIES RELATIVE TO SALES BECAUSE FIRMS CAN RECEIVE
ORDERS QUICKLY.

14. Credit policy has four main dimensions: (1) credit period, (2) discounts, (3) credit standards,
and (4) returns policy. FALSE

15. If a firm finances with commercial paper, this means that it is borrowing on a short-term
basis and is issuing a marketable promissory note that is a liquid asset for the lender. TRUE

16. When we talk about financing with "accruals," we are generally talking about wages that
have been earned but not yet paid plus taxes that must be paid within the coming year.
TRUE

17. What are the two main types of assets typically used as collateral for a short-term business
loan? INVENTORIES AND ACCOUNTS RECEIVABLE

31. The administrative costs associated with secured short-term financing are higher than similar
costs for unsecured loans. Therefore, the full cost (interest plus administrative costs) on secured
loans always exceeds the cost a company would have to pay to borrow on an unsecured basis.
FALSE