Test Bank for Entrepreneurial Finance, 5th Edition, J. Chris Leach Ronald W.

Melicher

Test Bank for Entrepreneurial Finance, 5th Edition, J.

Chris Leach Ronald W. Melicher

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 CHAPTER 6

MANAGING CASH FLOW

True-False Questions

T. 1. The actions of screening business ideas, preparing a business model/plan,

and obtaining seed financing occurs during a venture’s development stage.

T. 2. The actions of monitoring financial performance, determining project cash

needs, and obtaining first-round financing occurs during a venture’s survival
stage.

F. 3. “First-round financing” usually occurs during a venture’s rapid-growth life

cycle stage.

T. 4. Short-term financial planning is critical during the survival stage because

operations not yet turning a profit and the associated cash burn often lead to a
venture’s inability to pay its maturing liabilities.

T. 5. Cash shortages during the rapid growth stage frequently derive from the
lack of operating profits to fund working capital and fixed asset investments
needed to support sales growth.

F. 6. Due to the difficulty of projecting financial statements for a young firm,

short-term financial forecasts are never required of early-stage ventures.

F. 7. Early-stage ventures are defined as firms that are only operating in either
their development or startup stages.

T. 8. Even in a young, successful venture, restricted access to bank credit and

with little to no access to short-term lending markets can hinder operations
until the next round of financing.

F. 9. “First-round financing” usually occurs during a venture’s rapid-growth life

cycle stage.

T. 10. Short-term cash planning tools include preparation of a: sales schedule, a

purchases schedule, a wages and commissions schedule, and a cash budget.

F. 11. Short-term financial planning typically involves preparing monthly

financial statements and focuses on identifying and planning for net income
demands on the business.

38
 Chapter 6: Managing Cash Flow 39

T. 12. A venture’s operating schedules typically include a: sales schedule,

purchases schedule, and wages and commissions schedule.

F. 13. A cash budget shows a venture’s projected revenues and expenses over a
forecast period.

T. 14. Preparing monthly cash budgets for a full year allows the entrepreneur to
determine whether there will be a cash need, the maximum size of the cash
need, and whether the need can be repaid during the year.

T. 15. Conversion period ratios show the average time in days it takes to convert
certain current assets and current liabilities into cash.

F. 16. A venture’s operating cycle is the same as its cash conversion cycle.

F. 17. The sum of the inventory-to-sale conversion period and the purchase-to-
payment conversion period minus the sale-to-cash conversion period is called
the cash conversion cycle.

F. 18. The cash conversion cycle refers to the time it takes to convert a sale into
net income.

F. 19. The “cash conversion cycle” measures the time it takes to pay off the
principal on a loan.

F. 20. The sale-to-cash conversion period is calculated by dividing average

revenues by net sales per day.

T. 21. A venture’s cash conversion cycle will decrease if the purchase-to-

payment conversion period increases.

Multiple-Choice Questions

e. 1. A firm is said to be an early stage venture when it is in which of the

following except?
a. rapid growth stage
b. startup stage
c. development stage
d. survival stage
e. early-maturity stage

a. 2. Seed financing is generally associated with which one of the following life
cycle stages:
a. development stage
40 Chapter 6: Managing Cash Flow

b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage

c. 3. First-round financing is generally associated with which one of the

following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage

d. 4. Which of the following is not part of the operating cycle?

a. time it takes to purchase products
b. time it takes to produce products
c. time it takes to sell the products
d. time it takes to pay suppliers
e. time it takes to collect receivables

a. 5. Which one of the following “measures” the average days of sales

committed to the extension of trade credit?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle period

b. 6. Which of the following is measured by dividing the average daily cost of

goods sold into the average inventory?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle

c. 7. Which of the following measures the average time from purchase of

materials and labor to actual cash payment?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle

d. 8. Which of the following measures the average time it takes a firm to

complete its operating cycle after deducting the days supported by trade credit
and delayed payroll financing?
a. sale-to-cash conversion period
 Chapter 6: Managing Cash Flow 41

b. inventory-to-sale conversion period

c. purchase-to-payment conversion period
d. cash conversion cycle

c. 9. Which one of the following conversion periods operates to reduce the

length of the cash conversion cycle?
a. inventory-to-sale conversion period
b. sale-to-cash conversion period
c. purchase-to-payment conversion period
d. fixed assets-to-usage conversion period

d. 10. Which one of the following conversion periods is not a component in the
cash conversion cycle?
a. inventory-to-sale conversion period
b. sale-to-cash conversion period
c. purchase-to-payment conversion period
d. fixed assets-to-usage conversion period

a. 11. Calculate the inventory-to-sale conversion period based on the following

information: average inventories = $120,000; average receivables = $90,000;
average payables = $40,000; cost of goods sold = $182,500; and net sales =
$365,000.
a. 240.0 days
b. 180.0 days
c. 90.0 days
d. 60.0 days
e. 45.0 days

c. 12. Calculate the sale-to-cash conversion period based on the following

information: average inventories = $120,000; average receivables = $90,000;
average payables = $40,000; cost of goods sold = $182,500; and net sales =
$365,000.
a. 240.0 days
b. 180.0 days
c. 90.0 days
d. 60.0 days
e. 45.0 days

c. 13. Based on the following information, determine the venture’s cash

conversion cycle: Inventory-to-sale conversion period = 112.9 days; Sale-to-
cash conversion period= 57.1 days; and Purchase-to-payment conversion
period = 76.8 days.
a. 170.0 days
b. 189.7 days
c. 93.2 days
Test Bank for Entrepreneurial Finance, 5th Edition, J. Chris Leach Ronald W. Melicher

42 Chapter 6: Managing Cash Flow

d. 246.8 days
e. 133.9 days

a. 14. Determine the cash conversion cycle based on the following information:
inventory-to-sale conversion period = 112.9 days; sale-to-cash conversion
period = 57.1 days; and purchase-to-payment conversion period = 76.8 days.
a. 93.2 days
b. 132.6 days
c. 170.0 days
d. 246.8 days
e. 365.0 days

a. 15. Based on the following information, determine the average receivables

(rounded to thousands of dollars) that were outstanding: Net sales = $575,000;
Sale-to-cash conversion period = 57.1 days; Purchase-to-payment conversion
period = 76.8 days; and Cost of goods sold = $380,000.
a. $90,000
b. $180,000
c. $121,000
d. $31,000
e. $41,000

d. 16. Based on the following information, determine the venture’s inventory-to-

sale conversion period: cash conversion cycle = 250 days; sale-to-cash
conversion period = 60 days; and purchase-to-payment conversion period = 70
days.
a. 70 days
b. 140 days
c. 240 days
d. 260 days
e. 330 days

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