finance ch 6 – Flashcards
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Working capital management is primarily concerned with the management and financing of what?
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current assets
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A financial executive devotes the most time to what aspect of finance?
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working capital management
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What is a common reason for the pressure of current asset buildup?
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rapidly expanding sales
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What are "self liquidating" assets and how do they relate to permanent current assets?
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all the production will be sold, receivables collected, and bills paid over the time period specified.
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What are some types of companies that experience seasonal sales?
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retail
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What effect do seasonal sales have on inventory in a company that uses level production schedules?
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As sales decline, inventory will increase.
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When actual sales are greater than forecasted sales, what happens to the level of inventory, accounts receivables, and production schedules?
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Production schedules might have to be revised upward Accounts receivable will rise Inventory will decline
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Normally, permanent current assets should be financed by what source of financing?
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long-term funds
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What types of assets should be financed with long-term financing?
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Fixed assets and permanent current assets
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What would a conservatively financed firm's financing mix look like?
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Use long term financing for permanent current assets, and a portion of the short term fluctuating assets, and use short term financing for all other short term assets.
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Why do firms try to use more short-term financing than long-term financing?
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short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.
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What is the term structure of interest rates, and what influences it?
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changes daily to reflect current competitive conditions in the money and capital market. Influenced by: inflation the money supply Federal Reserve activities
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If money is tight, what happens to short term rates?
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short term rates are higher than long term rates
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What effect do illiquid assets have on the borrowing decisions of a firm?
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heavy short term borrowing?
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"Permanent current assets" means what kind of assets?
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some minimum level of current assets that are not self liquidating.
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What are some benefits of web-based supply chain management?
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1) Lower inventory, transportation, warehousing, and packaging costs 2) Greater supply chain flexibility 3) Improved customer service 4) Higher revenues 5) Increased profitability
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Give some examples of RFID use.
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track livestock track inventory at retailers track marathon runner's times
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Give an advantage of level production.
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manpower and equipment are used efficiently at lower costs.
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If a firm uses level production with seasonal sales, what happens to inventory as sales decline?
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As sales decline, inventory will increase.
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What happens when actual sales are greater than forecasted sales?
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Production schedules might have to be revised upward Accounts receivable will rise Inventory will decline
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Why is more use made of short-term financing?
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short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.
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What combination of asset structures and financing patterns is likely to create the least volatile earnings? The most volatile earnings?
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Least: Liquid assets and heavy long term borrowing Most:Illiquid assets and heavy short term borrowing
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How can you compensate for the risk exposure due to heavy short-term borrowing?
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carry highly liquid assets
