Which of the following statements is correct? a. Depreciation is included in the

Question

Which of the following statements is correct? a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 T) + Depreciation [Capital expenditures + NOWC]), hence depreciation is set forth on a separate line in the cash budget b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget c. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60 e. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August

Explanation / Answer

Answer:

Option b is correct.

Statement a is incorrect. Depreciation is not included since it accounts for capital spending.

Statement c is incorrect. Sound working capital policy is designed to minimize the time between cash expenditures

on materials and the collection of cash on sales

Statement d is incorrect. Payment terms 2/10 net 30, ( or 2 percent, 10 days, net 30 days) means if the customer pays the bill within 10 days of invoice date

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