Tiêu đề Reading 32 Working Capital _ Liquidity - Answers.pdf ✅

Question #1 of 15 Question ID: 1463581 An example of a primary source of liquidity is: A) using trade credit from vendors. B) renegotiating debt agreements. C) filing for bankruptcy. Explanation Primary sources of liquidity include cash resulting from selling goods and services, collecting receivables, generating cash from other sources and sources of short-term funding such as trade credit from vendors and lines of credit from banks. Filing for bankruptcy and renegotiating debt agreements are best described as secondary sources of liquidity because they are sources to which a firm resorts when in financial distress. (Module 32.1, LOS 32.c) Question #2 of 15 Question ID: 1463585 A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most likely conclude that the firm: A) may have credit policies that are too strict. B) has a lower cash conversion cycle than its peer companies. C) has better credit controls than its peer companies. Explanation The firm's average days of receivables should be close to the industry average. A significantly lower average days receivables outstanding, compared to its peers, is an indication that the firm's credit policy may be too strict and that sales are being lost to peers because of this. We cannot assume that stricter credit controls than the average for the industry are "better." We cannot conclude that credit sales are less, they may be more, but just made on stricter terms. The average days of receivables are only one component of the cash conversion cycle. (Module 32.1, LOS 32.d) Question #3 of 15 Question ID: 1463584
A company has better liquidity than its peer group if its: A) quick ratio is lower. B) average trade payables are lower. C) receivables turnover is higher. Explanation Higher receivables turnover is an indicator of better receivables liquidity since receivables are converted to cash more rapidly. A lower quick ratio is an indication of less liquidity. Lower trade payables could be related to better liquidity, but could also be consistent with very poor liquidity and a requirement from its suppliers of cash payment. (Module 32.1, LOS 32.d) Question #4 of 15 Question ID: 1463580 The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is best described as a: A) pull on liquidity. B) drag on liquidity. C) liquidity premium. Explanation When cash payments are made too quickly, the condition is known as a pull on liquidity. A drag on liquidity occurs when cash inflows lag. (Module 32.1, LOS 32.c) Question #5 of 15 Question ID: 1463586 The quick ratio is considered a more conservative measure of liquidity than the current ratio because the quick ratio excludes: A) inventories. B) marketable securities.
C) accounts receivable. Explanation The quick ratio is usually defined as (current assets – inventories) / current liabilities. The quick ratio excludes inventories from current assets because inventories are not necessarily liquid. It is a more restrictive measure of liquidity than the current ratio, which equals current assets / current liabilities. Current assets that remain in the numerator of the quick ratio include cash and cash equivalents, accounts receivable, and short-term marketable securities. (Module 32.1, LOS 32.d) Question #6 of 15 Question ID: 1463577 Which of the following sources of liquidity is the most reliable? A) Revolving line of credit. B) Committed line of credit. C) Uncommitted line of credit. Explanation A revolving line of credit is typically for a longer term than an uncommitted or committed line of credit and thus is considered a more reliable source of liquidity. With an uncommitted line of credit, the issuing bank may refuse to lend if conditions of the firm change. An overdraft line of credit is similar to a committed line of credit agreement between banks and firms outside of the U.S. Both committed and revolving lines of credit can be verified and can be listed in the footnotes to a firm's financial statements as sources of liquidity. (Module 32.1, LOS 32.a) Question #7 of 15 Question ID: 1463574 A large, creditworthy manufacturing firm would most likely get short-term financing by: A) issuing commercial paper. B) factoring its receivables. C) entering into an agreement for a committed line of credit. Explanation
Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper. (Module 32.1, LOS 32.a) Question #8 of 15 Question ID: 1463576 Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm's financial statements as a source of liquidity? A) Revolving line of credit. B) Factoring agreement. C) Uncommitted line of credit. Explanation With an uncommitted line of credit, the lender is not committed to make loans in any amount. A revolving line of credit is typically for a longer period and involves an agreement to lend funds in the future up to some maximum amount. Factoring does not typically involve an agreement for future receivables purchases. (Module 32.1, LOS 32.a) Question #9 of 15 Question ID: 1463578 A bank offers a corporation a line of credit for a certain amount but reserves the right to refuse to honor any request for the use of the line. This arrangement is best described as: A) a regular line of credit. B) a revolving line of credit. C) an uncommitted line of credit. Explanation