Working Capital Management Flashcards

An aging schedule of accounts receivable is used primarily to:

Answer: Monitor how long receivables have been outstanding

An aging schedule classifies receivables by how long they have been outstanding to flag collection problems.

Days sales outstanding (DSO) measures:

Answer: Average time to collect receivables

DSO indicates the average number of days a company takes to collect payment after a sale.

A line of credit is best described as a source of:

Answer: Pre-approved short-term borrowing up to a limit

A line of credit provides flexible short-term financing that a firm can draw on up to a preset limit.

Tightening a company's credit policy would most likely:

Answer: Reduce receivables but may lower sales

Stricter credit standards reduce receivables and bad debts but can also reduce sales volume.

Commercial paper is a working capital financing tool that is:

Answer: Short-term unsecured promissory notes issued by large, creditworthy firms

Commercial paper is unsecured short-term debt issued by financially strong corporations to fund working capital.

Factoring of accounts receivable involves:

Answer: Selling receivables to a third party for immediate cash

Factoring is the sale of receivables to a factor at a discount in exchange for immediate cash.

Stretching accounts payable beyond agreed terms is risky mainly because it can:

Answer: Damage supplier relationships and credit standing

Delaying supplier payments too far can harm supplier trust and the company's credit reputation.