Question

Case in Discussion

Teal Monkey Manufacturers’s management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company’s management expects that it will take 50 days to manufacture and sell its products and 40 days to receive payment from its customers. Teal Monkey Manufacturers’s CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 90 days.

Which of the following responses to the CFO’s statement is most accurate?

The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time.

The CFO’s approximation of the length of the bank loans should be accurate, because it will take 90 days for the company to manufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank.

Is it possible for a firm to have a negative CCC?

Yes

No

Answer 1

Solution:

1) Which of the following responses to the CFO’s statement is most accurate?

The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time. (Most Accurate)

Explanation: The above statement is most accurate regarding the time period of bank-loan. Since, if the firm needs to pay the supplier after taking certain length of time then in such cases, it should not take the loan for such avoidable period. Firm should take the loan only from the time beginning from, when payment need to be made to suppliers.

2) Is it possible for a firm to have a negative CCC?

Yes, it is possible for the firms to have a negative CCC. For example if the company make the policy to make the sales only on cash basis and no any credit sale. In such case CCC can be negative.

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