Question

1. If the company was being sold, the sale price of the company (if based on a multiple of cash flow) could be artificially inflated by

a. Keeping inventory constant

b. Depleting inventory over time

c. Pre-paying for inventory

d. a. and c.

e. None of the above

2. Inventory serves a number of functions within the business environment. What is (are) a function of inventory?

a. To create stock out

b. To ignore hedging against price increases

c. Prepare for unanticipated demand

d. To disregard order discounts

e. Make production rates and demand rates dependent on each other with no buffer

3. A Ford dealer in Rialto, CA is replacing Garrett variable vane turbochargers on 2008-2012 Ford F-450 trucks at an average rate of 30 units per week. The lead time to replenish their inventory is constant at 3 weeks. John is trying to change the existing re-order point of 84 units because it is yielding a stock out risk (risk of running out of inventory) of 80%. In his argument, he wants to determine demand variability. What it is the dealer’s standard deviation of demand?

a. -0.84

b. 2.72

c. -1.45

d. 0.33

e. 4.14

Answer 1

Ans to Question 1.

As per general parlance, working capital accounts are most directly responsible for the reporting of cash flow. Receivables increase cash flow, while accounts payable decrease cash flow. A company could artificially inflate its cash flow by accelerating the recognition of funds coming in and delay the recognition of funds leaving until the next period. This is similar to delaying the recognition of written checks. These are only short-term fixes; by accelerating receivables for the current period, the company is actually reducing them for the next period.

In case of multiple cash flow scenario the cash flow can be increased by depleting inventory over time, hence option B. is correct.