© 2000 John Petroff
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© 2000 John Petroff |
Questions for Chapter 8 Liquidity
Review questions
Q-8.1
Define liquidity.
Q-8.2 What asset is most
liquid?
Q-8.3 Which asset is least
liquid?
Q-8.4 How is GAAP balance
sheet organized?
Q-8.5 What does it imply
if a firm does not have sufficient liquidity to meet its current
obligations?
Q-8.6 What is the reflection
on management if a firm appears insolvent?
Q-8.7 Why is the analysis
of solvency usually the first step an financial analysis?
Q-8.8 What assets are included
in measurements of liquidity?
Q-8.9 What has be the trend
in presence of liquidity in American firms over the past 50 years?
Q-8A1.1
How important is liquidity to lenders?
Q-8A1.2 Do banks prefer
the highest or lowest liquidity possible? Why?
Q-8A2.1
What do outside investors see in the liquidity of a company?
Q-8A2.2 Do shareholders
prefer the company holds large cash balances?
Q-8A2.3 Is holding cash
costly? Explain.
Q-8A2.4 Is holding cash
lowering corporate rate of return and stock market price?
Q-8A2.5 Are there other
reasons for having liquidity other than making payments? Give
reasons.
Q-8A2.6 What is the purpose
of having accounts receivables?
Q-8A2.7 What is the purpose
of having inventory?
Q-8A2.8 What long term goals
does holding cash serve?
Q-8A2.9 Should there be
a correlation between company risk and holding of cash? Discuss.
Q-8A2.10 Do all firms have
to have similar levels of liquidity? Do management strategies
affect that?
Q-8A2.11 How does access
to credit and capital markets affect the need to hold large cash
balances?
Q-8A3.1
Is analysis of liquidity interconnected with other aspects of
financial analysis?
Q-8A3.2 How can liquidity
be increased other than just having more liquid assets?
Q-8A3.3 How do bankers suggest
to their loan applicants to increase liquidity?
Q-8A3.4 Is the need for
liquidity affected by the type of industry the company is in?
Discuss.
Q-8B.1
What is the name given to the process of liquid resources moving
through the productive cycle?
Q-8B.2 Where does the cash
cycle starts? Where does it ends?
Q-8B.3 Describe the complete
movement of cash through the cash cycle.
Q-8B.4 Give examples of
short cash cycles.
Q-8B.5 Give examples of
cash cycles that are lengthy.
Q-8B.6 How can the cash
cycle be estimated?
Q-8B.7 Is the cash cycle
estimate accurate for manufacturing firms?
Q-8B.8 Which industry has
the longest cash cycle?
Q-8B.9 Which industry has
the shortest cash cycle?
Q-8C.1
What is the name given to the resources making up current assets?
Q- 8C.2Why looking at working
capital is just as important as calculating a current ratio?
Q-8C1.1 Give formula for
total working capital.
Q-8C1.2 Give four examples
of adjustments to components of working capital when working capital
is calculated.
Q-8C1.3 Which industry has
the largest relative size total working capital?
Q-8C1.4 Which industry has
the smallest relative size total working capital?
Q-8C2.1
Give formula for net working capital.
Q-8C2.2 List adjustments
to net working capital.
Q-8C2.3 Which of the six
industries studied has the largest relative net working capital?
Q-8C2.4 Which of the six
industries studied has the smallest relative net working capital?
Q-8D1.1
Give formula for current ratio.
Q-8D2.1
What is meant by the observation that the current ratio has a
liquidating meaning?
Q-8D2.2 What is meant by
the statement that the current ratio is indicative of a going
concern?
Q-8D2.3 How appropriate
is the rule of thumb that a current ratio should approximate two
for the industries studied?
Q-8D2.4 Do larger firms
have higher current ratios in all the industries studied?
Q-8D3.1
What are the major factors that affect the current ratio?
Q-8D3.2 What is the limitation
of the current ratio?
Q-8D3.3 Is the current ratio
as good predictive tool?
Q-8D3.4 What theoretical
problem is present in the construction of the current ratio?
Q-8D4.1
What is the median value of the current ratio in American firms
in 1999? How does that compare with 50 years ago?
Q-8E1.1 Give formula for quick ratio?
Q-8E2.1
What adjustment may be necessary to components of quick ratio?
Is the adjustment always possible to be performed?
Q-8E3.1
What information does the quick ratio reveal?
Q-8E3.2 Can meaningful implications
be drawn from the quick ratio beyond an indication that the company
is solvent and does not rely on inventory to make payments?
Q-8E3.3 Is the rule of thumb
that the quick ratio should approximate one supported by evidence
studied?
Q-8F.1
List all the reasons why firms hold cash balances.
Q-8F1.1 What bank arrangements
allow holding practically no cash on hand?
Q-8F1.2 Is the return on
money market accounts sufficient to justify holding any amount
in such accounts?
Q-8F1.3 What makes cash
in money market accounts lose money?
Q-8F1.4 What is the cost
of not having sufficient cash on hand?
Q-8F1.5 How is the optimum
cash balance determined?
Q-8F1.6 Do management plans
affect the calculation of optimum cash balance?
Q-8F1.7 With the help of
what schedule are regular collections and disbursements studied?
Q-8F1.8 How are cash needs
for major capital outlays studied?
Q-8F2.1
Does empirical data supports the general belief that manufacturing
firms hold large cash balances? What is the rational for the belief?
Q-8F2.2 Does empirical data
confirms that smaller firms hold larger cash balances?
Q-8F2.3 What is the reason
why smaller firms should hold more cash?
Q-8F3.1
Does historical data show that firms hold now more or less cash
on hand than in the past?
Q-8F3.2 Give reasons that
explain the changing historical pattern.
Q-8F4.1 Give formula for cash ratio.
Q-8G.1
What is the purpose of accounts receivable analysis?
Q-8G.2 What strategies and
policies are involved in the analysis of accounts receivable?
Q-8G1.1 Give formula for
accounts receivable turnover.
Q-8G1.2 What adjustment
are desirable to the accounts receivable turnover ratio?
Q-8G2.1
Give formula for days sales outstanding.
Q-8G2.2 What other name
is sometimes used for days sales outstanding ratio?
Q-8G2.3 When compared to
industry statistics, what does the days sales outstanding ratio
reveal?
Q-8G3.1
What is the name given to a statement where all accounts receivable
are grouped by the number of days the accounts are outstanding?
Q-8G3.2 What is the purpose
of the receivables aging schedule?
Q-8G3.3 Is there a correlation
between how long a debt is outstanding and its eventual default?
Q-8G4.1
What would an increasing proportion of accounts receivable in
a balance sheet indicate?
Q-8G5.1 Does the empirical
data studied indicate that large firms use accounts receivable
more?
Q-8G5.2 What are reasons
why larger firms extend more credit to clients?
Q-8G6.1 Does historical
data studied indicate that American firms extend less credit to
their clients than in the past?
Q-8H.1
What is the purpose of holding inventory?
Q-8H.2 In which circumstances
will a manufacturing plant capable of holding no inventory?
Q-8H.3 Which industries
have no inventory?
Q-8H.4 Which industries
carry large inventory?
Q-8H.5 How is the optimum
level of inventory determined for a firm?
Q-8H.6 Give formula for
total inventory cost.
Q-8H.7 Give formula or explain
annual ordering cost.
Q-8H.8 Give formula or explain
annual carrying cost.
Q-8H.9 Give formula for
economic order quantity.
Q-8H.10 What is safety stock?
Why purpose does safety stock serve?
Q-8H.11 Define lead time.
Does lead time vary over the year?
Q-8H.12 Does an outside
analyst normally verify inventory management efficiency with the
help of economic order quantity calculation? What other approaches
are available?
Q-8H1.1
Give formula for inventory turnover.
Q-8H1.2 Why should inventory
turnover be calculated with average inventory instead of ending
inventory? Is there still a distortion in the averaging?
Q-8H1.3 What are the accounting
method considerations that can make an inventory turnover ratio
not comparable with other firms?
Q-8H1.4 What is the inventory
accounting method a firm using if it is not using standard costs?
Q-8H1.5 If a firm reevaluates
its inventory should be higher or lower of which value?
Q-8H1.6 If a firm is not
using FIFO or average cost, which method is it using?
Q-8H1.7 Should an outside
analyst make changes to inventory amount if it is know that the
firm is using methods that are different than its competitors?
Q-8H1.8 When a firm switches
from LIFO to FIFO, does the inventory turnover ratio increase
or decrease?
Q-8H2.1
What three additional turnover ratios are calculated for manufacturing
firms?
Q-8H2.2 How can one determine
if a firm has inventory beyond is current operating needs?
Q-8H2.3 Why do certain firms
(or industries) hold inventory beyond their current operating
needs?
Q-8H2.4 What adjustment
to inventory is performed annually after inventory taking?
Q-8H2.5 What inventory method
is used in the American retail industry?
Q-8H3.1
Give formula for days sales in inventory.
Q-8H3.2 Is an inventory
aging schedule shown in notes to financial statements?
Q-8H5.1
Does the historical data studied reveal an increase or decrease
of the relative size of inventory in total assets of American
firms? How can this be explained?
Q-8H6.1
What are the different types of interpretations of the meaning
of a high turnover ratio?
Q-8H6.2 What are the different
types of interpretations of the meaning of a low turnover ratio?
Q-8H6.3 Is it sometimes
necessary to visit company warehouses to determine the quality
of inventory?
Q-8I.1
How can one study whether a firm uses an adequate level of current
liabilities?
Q- 8I.2Give formula for
days purchases outstanding.
Q-8I.3 When compared to
the industry, what does days purchase outstanding reveal?
Q-8I.4 If a firm is deny
credit, does that improve or worsen current and quick ratios?
Q-8I.5 Does it make economic
sense to use cash discounts for early payment?
Q-8I.6 What are some off
balance sheet liabilities? How can an outside analyst find out
about them?
Q-8J.1
Why is an analysis of cash flows superior to an analysis of liquidity?
Q-8J.2 Why is it cash flow
and not profit that bank study to determine their expectation
that a firm will be able to meet its obligations?
Q-8J1.1
What is the name given to a statement that presents how changes
in liquidity have occurred during the past year?
Q-8J1.2 What are the three
parts of a statement of cash flows?
Q-8J1.3 What are the two
methods of presentation of a statement of cash flows?
Q-8J1.4 What is the bottom
line of a statement of cash flows?
Q-8J2.1
What is the purpose of a Sources and Uses of Funds Statement?
How is it prepared?
Q-8J2.2 What are the limitations
of both statement of cash flows and sources and uses of funds
statement?
Q-8J3.4 Define and explain
the concept of free cash flow.
Q-8J3.5 Why is free cash
flow important for the future of the firm?
Q-8J4.1
Give formula for cash flows used to determine the ability of the
firm to repay debt.
Q-8J4.2 Give formula for
cash flow to current debt ratio. What is the purpose of this ratio?
Q-8J4.3 Give formula for
cash flow to total debt ratio. What is the purpose of this ratio?
Q-8J5.1
What is the name given to a statement showing all monthly collections
and disbursements, as well as cash balance, outstanding bank credit,
new borrowing and repayments?
Q-8J5.2 Explain the purpose
of a cash budget.
Q-8J5.3 How is the optimum
cash balance integrated into a cash budget?
Q-8J5.4 What line of the
cash budget should become zero at least once in the twelve months
shown in the cash budget?
Q-8J5.5 To whom cash budgets
are given outside the firm?
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