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Explain the connection between a firm's accounting-based profitability and its cash
cycle ?

A firm's accounting - based profitability is measured by using its Total Asset Turnover. 

If the (TA) is higher, the greater the firm's accounting Return on Assets (ROA) and
Return on Equity (ROE). 

Thus, all things being the same, the shorter the cash cycle is, the lower is the firm's
investment in inventories and receivables. As a result, the firm's total assets are lower,
and the total turnover is higher.

What keeps the real world from being an ideal one in which net working capital
could always be zero?

A long-term rise in sales level will result in a permanent investment in current assets. 
In addition, any day-to-day and month-to-month fluctuation in the level of sales will
produce a nonzero NWC

What considerations determine the optimal size of the firm's investment in current
assets?
Firm invests the optimal level of money by considering the different costs that are
involved in the different short - term financing policies which are available. The
important considerable costs are carrying costs and shortage costs.

What considerations determine the optimal compromise between flexible and

restrictive net working capital policies?
Depends on:
1) Cash reserves: how much cash does management want?
2) Maturity hedging: matching of asset and liability maturity
3) Relative interest Rates: the difference between short term and long term interest rate.
1- Which of the following are uses of cash?
I. collecting a receivable
II. increasing inventory
III. obtaining a bank loan
IV. paying a supplier for previous purchases 
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and IV only
E. II, III, and IV only
2-Which one of the following will increase net working capital? Assume the current
ratio is greater than 1.0. 
A. paying a supplier for a previous purchase
B. paying off a long-term debt
C. selling inventory at cost
D. purchasing inventory on credit
E. selling inventory at a profit on credit
3-. Which one of the following will decrease the net working capital of a firm?
Assume the current ratio is greater than 1.0. 
A. selling inventory at cost
B. collecting payment from a customer
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying a supplier for the purchase of an inventory item
4-Which of the following are sources of cash?
I. decrease in inventory
II. increase in accounts receivable
III. repayment of a bond
IV. sale of preferred stock 
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, III, and IV only

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5-Which of the following will increase the operating cycle?
I. increasing the inventory turnover rate
II. increasing the payables period
III. decreasing the receivable turnover rate
IV. decreasing the inventory level 
A. I only
B. III only
C. II and IV only
D. I and IV only
E. II and III only
6-Which one of the following equals the operating cycle? 
A. cash cycle plus accounts receivable period
B. inventory period plus the accounts receivable period
C. inventory period plus the accounts payable period
D. accounts payable period minus the cash cycle
E. accounts payable period plus the accounts receivable period
7-Which one of the following will decrease the operating cycle? 
A. decreasing the inventory turnover rate
B. decreasing the accounts payable period
C. increasing the accounts receivable turnover rate
D. increasing the accounts payable period
E. increasing the accounts receivable period
8-. The operating cycle describes how a product: 
A. is priced.
B. is sold.
C. moves through the current asset accounts.
D. moves through the production process.
E. generates a profit.
9-Which of the following determines the length of the operating cycle?
I. cash cycle
II. inventory period
III. accounts payable period
IV. accounts receivable period 
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV

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10-Which of the following will increase the cash cycle, all else constant?
I. increasing the inventory period
II. decreasing the accounts receivable turnover rate
III. increasing the accounts payable period
IV. decreasing the accounts receivable period 
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, and III only
E. I, III, and IV only
11-An increase in which one of the following will decrease the cash cycle, all
else equal? 
A. payables turnover
B. days sales in inventory
C. operating cycle
D. inventory turnover rate
E. accounts receivable period
12-Metal Designs, Inc., historically produced products for inventory. Now, the firm
only produces a product when it receives an actual order from a customer. All
else equal, this change will: 
A. increase the operating cycle.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period.
D. decrease the cash cycle.
E. decrease the inventory turnover rate.
13- Which of the following statements are correct?
I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle. 
A. I only
B. III and IV only
C. I and III only
D. I and IV only
E. I, II, and III only

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14-Which one of the following statements is correct concerning the cash cycle? 
A. The longer the cash cycle, the more likely a firm will need external financing.
B. Increasing the accounts payable period increases the cash cycle.
C. A positive cash cycle is preferable to a negative cash cycle.
D. The cash cycle can exceed the operating cycle if the payables period is equal to
zero.
E. Offering early payment discounts to customers will tend to increase the cash cycle.
15-Which of the following actions will tend to decrease the inventory period?
I. discontinuing all slow-selling merchandise
II. selling obsolete inventory below cost just to get rid of it
III. buying raw materials only as needed for the manufacturing process
IV. producing goods on demand versus for inventory 
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
16-Which one of the following actions will tend to increase the accounts receivable
period? Assume the accounts receivable period is currently 34 days. 
A. tightening the standards for granting credit to customers
B. refusing to grant additional credit to any customer who pays late
C. increasing the finance charges applied to all customer balances outstanding over
thirty days
D. granting discounts for cash sales
E. eliminating the discount for early payment by credit customers
17-An increase in which one of the following is an indicator that an accounts
receivable policy is becoming more restrictive? 
A. bad debts
B. accounts receivable turnover rate
C. accounts receivable period
D. credit sales
E. operating cycle
18-If you pay your suppliers five days sooner, then: 
A. your payables turnover rate will decrease.
B. you may require additional funds from other sources to fund the cash cycle.
C. the cash cycle will decrease.
D. your operating cycle will increase.
E. the accounts receivable period will decrease.

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19-Which one of the following will increase the accounts payable period, all else
constant? 
A. an increase in the cost of goods sold account value
B. an increase in the ending accounts payable balance
C. an increase in the cash cycle
D. a decrease in the operating cycle
E. an increase in the accounts payable turnover rate
20-Which one of the following managers determines which customers must pay cash
and which can charge their purchases? 
A. purchasing manager
B. credit manager
C. controller
D. production manager
E. payables manager
21-Which one of the following managers determines when a supplier will be paid? 
A. controller
B. payables manager
C. credit manager
D. purchasing manager
E. production manager
22- A firm with a flexible short-term financial policy will: 
A. maintain a low balance in accounts receivables.
B. only have minimal amounts, if any, invested in marketable securities.
C. invest heavily in inventory.
D. have low cash balances.
E. have tight restrictions on granting credit to customers.

 23-Which one of the following is indicative of a short-term restrictive financial

policy? 
A. purchasing inventory on an as-needed basis
B. granting credit to all customers
C. investing heavily in marketable securities
D. maintaining a large accounts receivable balance
E. keeping inventory levels high
 

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24-Which of the following are associated with a restrictive short-term financial
policy?
I. little, if any, investment in marketable securities
II. liberal credit terms for customers
III. low cash balances
IV. increasing inventory levels 
A. I and III only
B. II and IV only
C. I and IV only
D. III and IV only
E. I, II, and III only 
25-. The Lumber Mart recently replaced its management team. As a result, the firm is
implementing a restrictive short-term policy in place of the flexible policy under
which the firm had been operating. Which of the following should the employees
expect as a result of this policy change?
I. reduction in sales due to stock outs
II. greater inventory selection
III. decreased sales due to the new accounts receivable credit policy
IV. decreased investment in marketable securities 
A. I and II only
B. II and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
26-A flexible short-term financial policy: 
A. increases a firm's need for long-term financing.
B. minimizes net working capital.
C. avoids bad debts by only selling items for cash.
D. maximizes fixed assets and minimizes current assets.
E. is most appropriate for a firm with relatively high carrying costs and relatively low
shortage costs.
27-A flexible short-term financial policy:
I. increases shortage costs due to frequent cash-outs.
II. tends to increase sales as compared to a restrictive policy.
III. requires a sizeable investment in current assets.
IV. incurs more carrying costs than a restrictive policy. 
A. I and IV only
B. II and III only
C. I, II, and III only

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D. II, III, and IV only
E. I, III, and IV only