FIN 331 FINAL CHAPTER 14 & CHAPTER 15 WESTERN ILLINOIS
QUESTIONS AND ANSWERS 2026/2027
working capital - Ans✅✅✅ A firm's investment in short-term assets— cash, marketable securities,
inventory, and accounts receivable
working capital policy - Ans✅✅✅ Decisions regarding (1) the target levels for each current asset
account and (2) how current assets will be financed.
cash conversion cycle - Ans✅✅✅ The length of time from the payment for the purchase of raw
materials to manufacture a product until the collection of accounts receivable associated with the sale
of the product.
ICP - inventory conversion period - Ans✅✅✅ the amount of time a product remains in inventory in
various stages of completion.
DSO - Receivables collection period - Ans✅✅✅ The time it takes to collect cash following a credit
sale; also known as days sales outstanding (DSO).
DPO - Payables deferral period - Ans✅✅✅ the average length of time between the purchase of raw
materials and labor and the payment of cash for them; also known as days payables outstanding (DPO).
Current Asset Financing Policies - Ans✅✅✅ ○Basic question: How should current assets be financed?
○Permanent current assets versus temporary current assets:
*Permanent CA—level that remains stable no matter seasonal or economic conditions (some minimum
level of CA).
*Temporary CA—level that fluctuates according to seasonal or economic conditions.
,Alternative current asset financing policies - Ans✅✅✅ -Maturity Matching Approach
~A financing policy that matches asset and liability maturities; considered a moderate current asset
financing policy.
~"Self-liquidating", because the idea is to match liabilities' maturities with assets' maturities.
~If maturities can be matched, the firms that use this approach should not have difficulty paying
maturing obligations.
~Some assets' lives are uncertain.
~Moderate approach.
-2 factors that prevent exact maturity matching
1. uncertainty about the life of an asset
2. some common equity is used, it has no maturity
-Conservative Approach
~A policy under which all of the fixed assets, all of the permanent current assets, and some of the
temporary current assets of a firm are financed
with long-term capital.
~Use permanent (long-term) capital to finance all permanent assets and some seasonal, temporary
needs.
~Use spontaneous, short-term debt to finance the rest of the temporary assets (seasonal needs).
~Store liquidity during the off season.
, ~Least profitable, but also least risky approach
-Aggressive Approach
~A policy under which all of the fixed assets of a firm are financed with long-term capital, but some of
the firm's permanent current assets are financed with short-term nonspontaneous sources of funds.
~Finance all temporary assets with short-term, spontaneous debt, and finance all fixed assets and some
permanent assets with long-term, non-spontaneous funds.
~Riskiest approach.
~Most profitable approach.
-spontaneous funds
*results of growth not additional financing; borrowing
Pros and cons of short term financing - Ans✅✅✅ ○Maturity—short-term debt generally is defined as
a liability originally scheduled for repayment within one year.
○Speed—a short-term loan can be obtained much faster than long-term credit.
○Cost—short-term debt generally is less expensive (interest rate is lower) than long-term debt.
○Risk—short-term debt is considered riskier than long-term debt.
-advantages:
*easy to negotiate
*flexible
*cheaper
QUESTIONS AND ANSWERS 2026/2027
working capital - Ans✅✅✅ A firm's investment in short-term assets— cash, marketable securities,
inventory, and accounts receivable
working capital policy - Ans✅✅✅ Decisions regarding (1) the target levels for each current asset
account and (2) how current assets will be financed.
cash conversion cycle - Ans✅✅✅ The length of time from the payment for the purchase of raw
materials to manufacture a product until the collection of accounts receivable associated with the sale
of the product.
ICP - inventory conversion period - Ans✅✅✅ the amount of time a product remains in inventory in
various stages of completion.
DSO - Receivables collection period - Ans✅✅✅ The time it takes to collect cash following a credit
sale; also known as days sales outstanding (DSO).
DPO - Payables deferral period - Ans✅✅✅ the average length of time between the purchase of raw
materials and labor and the payment of cash for them; also known as days payables outstanding (DPO).
Current Asset Financing Policies - Ans✅✅✅ ○Basic question: How should current assets be financed?
○Permanent current assets versus temporary current assets:
*Permanent CA—level that remains stable no matter seasonal or economic conditions (some minimum
level of CA).
*Temporary CA—level that fluctuates according to seasonal or economic conditions.
,Alternative current asset financing policies - Ans✅✅✅ -Maturity Matching Approach
~A financing policy that matches asset and liability maturities; considered a moderate current asset
financing policy.
~"Self-liquidating", because the idea is to match liabilities' maturities with assets' maturities.
~If maturities can be matched, the firms that use this approach should not have difficulty paying
maturing obligations.
~Some assets' lives are uncertain.
~Moderate approach.
-2 factors that prevent exact maturity matching
1. uncertainty about the life of an asset
2. some common equity is used, it has no maturity
-Conservative Approach
~A policy under which all of the fixed assets, all of the permanent current assets, and some of the
temporary current assets of a firm are financed
with long-term capital.
~Use permanent (long-term) capital to finance all permanent assets and some seasonal, temporary
needs.
~Use spontaneous, short-term debt to finance the rest of the temporary assets (seasonal needs).
~Store liquidity during the off season.
, ~Least profitable, but also least risky approach
-Aggressive Approach
~A policy under which all of the fixed assets of a firm are financed with long-term capital, but some of
the firm's permanent current assets are financed with short-term nonspontaneous sources of funds.
~Finance all temporary assets with short-term, spontaneous debt, and finance all fixed assets and some
permanent assets with long-term, non-spontaneous funds.
~Riskiest approach.
~Most profitable approach.
-spontaneous funds
*results of growth not additional financing; borrowing
Pros and cons of short term financing - Ans✅✅✅ ○Maturity—short-term debt generally is defined as
a liability originally scheduled for repayment within one year.
○Speed—a short-term loan can be obtained much faster than long-term credit.
○Cost—short-term debt generally is less expensive (interest rate is lower) than long-term debt.
○Risk—short-term debt is considered riskier than long-term debt.
-advantages:
*easy to negotiate
*flexible
*cheaper
