1- The cash conversion cycle (CCC) combines three factors: The inventory convers

Question

1- The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

True

False

2- Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

True False

3- Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

True

False

4- "Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

True

False

5- Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30. The change is meant to meet competition, so no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change.

True

False

6- If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

True

False

Explanation / Answer

1) TRUE.

The shorter the cycle the lesser the investment in working capital, which indicates efficiency.

2) FALSE.

3) TRUE.

4) FALSE.

5) TRUE

6) FALSE

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