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Chapter 14

Working Capital and Current


Assets Management

■ Learning Goals
1. Understand short-term financial management, net working capital, and the related tradeoff between
profitability and risk.

2. Describe the cash conversion cycle, its funding requirements, and the key strategies for managing it.

3. Discuss inventory management: differing views, common techniques, and international concerns.

4. Explain the credit selection process and the quantitative procedure for evaluating changes in credit
standards.

5. Review the procedures for quantitatively considering cash discount changes, other aspects of credit
terms, and credit monitoring.
6. Understand the management of receipts and disbursements, including floats, speeding collections,
slowing payments, cash concentration, zero-balance accounts, and investing in marketable
securities.

■ True/False
1. A firm that is unable to pay its bills as they come due is technically insolvent.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Basics of Short-Term Financial Management

2. The short-term financial management is concerned with management of the firm’s current assets and
current liabilities.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Basics of Short-Term Financial Management
Chapter 14 Working Capital and Current Assets Management 557

3. In the short-term financial management, the goal is to manage each of the firm’s current assets and
current liabilities in order to achieve a balance between profitability and risk that contributes to the
firm’s value.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Basics of Short-Term Financial Management

4. Working capital represents the portion of the firm’s investment that circulates from one form to
another in the long-term conduct of business.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Working Capital Management

5. In general, the more a firm’s current assets cover its short-term obligations, the better able it will be
to pay its bills as they come due.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Working Capital Management

6. The more predictable its cash inflows, the more net working capital a firm needs.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Working Capital Management

7. As the ratio of current assets to total assets increases, the firm’s risk increases.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 1
Topic: Working Capital Management

8. Because firms are unable to match cash inflows to outflows with certainty, most of them need
current liabilities that more than cover outflows for current assets.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 1
Topic: Working Capital Management

9. Too much investment in current assets reduces profitability, whereas too little investment increases
the risk of not being able to pay debts as they come due.
Answer: TRUE
Level of Difficulty: 2
Learning Goal: 1
Topic: Tradeoff Between Profitability and Risk