Exam 16: Managing Short-Term Liabilities Financing

The amount of checks that have been received and deposited but have not yet been made available to the account in which they were deposited is the float.

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

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 Fashion Clothiers' minimum cost of ordering and holding inventory?

For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential.

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

Which of the following might be attributed to efficient inventory management?

If the carrying costs of inventory increase then the economic ordering quantity of inventory will increase to insure the firm minimizes the total inventory costs.

A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non- payment.

In part because money has time value, cash sales are always more profitable and more valuable than credit sales.

In the text, the "red-line method" refers to

Having synchronized cash flows enables a firm to

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Cross Collectibles currently fills mail orders from all over the U.S.and receipts come in to headquarters in Little Rock, Arkansas.The firm's average accounts receivable (A/R) is $2.5 million and is financed by an 11 percent annual, simple interest bank loan.Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent.The annual cost of the system is $15,000.What is the estimated net annual savings to the firm from implementing the lockbox system?

Generally, the longer the normal inventory holding period of a customer the longer the credit period.One effect of extending the credit period to match the customer's merchandise holding period is to increase the customer's payables deferral period which actually serves to shorten the customer's cash conversion cycle.

Which of the following statement completions is correct? If the yield curve is upward sloping, then a firm's marketable securities portfolio, assumed to be held for liquidity purposes, should be

Which of the following activities will increase the short-term net cash flow for a firm?

Other things equal and held constant, a firm with an effective accounts receivable monitoring system, when compared with a firm without such a monitoring system, will likely have lower additional funds needed.

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

Reston Inc.has expected sales of $17,000,000.While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30.Assume that the cost of funds invested in receivables is 10 percent.Suppose that the firm's customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360- day year, and that the firm's variable cost ratio is 80 percent.What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers?

Credit associations and credit reporting agencies are two major sources of external credit information on credit customers.