Exam 16: Managing Short-Term Liabilities Financing

Short term assets generally earn a higher rate of return than long-term assets, making short term assets a more desirable investment than long-term assets.

If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.

The Danser Company expects to have sales of $30,000 in January, $33,000 in February, and $38,000 in March.If 20 percent of sales are for cash, 40 percent are credit sales paid in the month following the sale, and 40 percent are credit sales paid 2 months following the sale, what are the cash receipts from sales in March?

Bass Boats Inc.currently has sales of $1,000,000, and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000.However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent).Variable costs are 80 percent of sales, and Bass has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?

The credit period is length of time for which credit is granted; after that time, the credit account is considered delinquent.

Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.

Collections float offsets disbursement float.If a firm's collections float is greater than its disbursement float then a firm is said to operate with positive net float.

For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance?

The target cash balance is the minimum cash balance a firm desires to maintain in order to conduct business.

Fashion Clothiers Inc. Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Fashion Clothiers Inc.What is the firm's EOQ?

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a clear indication that your firm's credit policy has weakened.

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

The primary purpose of compensating balances required of borrowers is to compensate the bank in the event the borrower defaults on the loan.

Which of the following statements is correct?

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Which of the following is not a reason for firms to own marketable securities?

A lockbox plan is