Deck 18: Short Term Finance and Planning

Question 1

Which one of the following actions will tend to increase the inventory period?

A) Discontinuing all slow-selling merchandise
B) Selling obsolete inventory below cost just to get rid of it
C) Buying raw materials only as needed for the manufacturing process
D) Producing goods on demand versus for inventory
E) Increasing inventory selection to attract more customers

Answer 1

Increasing inventory selection to attract more customers

Question 2

Which one of these will decrease the cash cycle, all else held constant?

A) Increasing the accounts receivable turnover rate
B) Decreasing the accounts payable period
C) Increasing the inventory period
D) Decreasing the inventory turnover rate
E) Increasing the accounts receivable period

Answer 2

Increasing the accounts receivable turnover rate

Question 3

Which one of the following actions represents a source of cash?

A) Granting credit to a customer
B) Purchasing new machinery
C) Making a payment on a bank loan
D) Purchasing inventory
E) Accepting credit from a supplier

Answer 3

Accepting credit from a supplier

Question 4

Which one of the following statements is correct concerning the cash cycle?

A) The longer the cash cycle, the more likely a company will need external financing.
B) Increasing the accounts payable period increases the cash cycle.
C) Accepting a supplier's discount for early payment decreases the cash cycle.
D) The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E) Offering early payment discounts to customers will tend to increase the cash cycle.

Question 5

Which one of these statements is correct? Assume all else held constant.

A) A decrease in the accounts receivable turnover rate decreases the cash cycle.
B) The cash cycle is equal to the operating cycle minus the inventory period.
C) A negative cash cycle is preferable to a positive cash cycle.
D) A decrease in the accounts payable period shortens the cash cycle.
E) The cash cycle plus the accounts receivable period is equal to the operating cycle.

Question 6

A decrease in which one of the following will increase the cash cycle, all else held constant?

A) Payables turnover
B) Days sales in inventory
C) Operating cycle
D) Inventory turnover rate
E) Accounts receivable period

Question 7

Which one of the following will decrease the operating cycle?

A) Decreasing the inventory turnover rate
B) Decreasing the accounts payable period
C) Increasing the accounts receivable turnover rate
D) Increasing the accounts payable period
E) Increasing the accounts receivable period

Question 8

The operating cycle is equal to the:

A) cash cycle plus the accounts receivable period.
B) inventory period plus the accounts receivable period.
C) inventory period plus the accounts payable period.
D) accounts payable period minus the cash cycle.
E) accounts payable period plus the accounts receivable period.

Question 9

Assume all else held constant. If you pay your suppliers three days sooner, then:

A) your payables turnover rate will decrease.
B) you may require additional funds from other sources to fund the cash cycle.
C) the cash cycle will decrease.
D) your operating cycle will decrease.
E) the accounts receivable period will decrease.

Question 10

An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive?

A) Bad debts
B) Accounts receivable turnover rate
C) Accounts receivable period
D) Credit sales
E) Operating cycle

Question 11

Which one of these activities represents a source of cash?

A) Increasing accounts receivable
B) Decreasing inventory
C) Increasing fixed assets
D) Decreasing accounts payable
E) Decreasing common stock

Question 12

The operating cycle describes how a product:

A) is priced.
B) is sold.
C) moves through the current asset accounts.
D) moves through the production process.
E) generates a profit.

Question 13

Which one of the following actions will increase net working capital? Assume the current ratio is greater than 1.0.

A) Paying a supplier for a previous purchase
B) Paying off a long-term debt
C) Selling inventory at cost for cash
D) Purchasing inventory on credit
E) Selling inventory at a profit on credit

Question 14

Metal Designs historically produced products for inventory. Now, they only produce a product when an actual order is received from a customer. All else equal, this change will:

A) increase the operating cycle.
B) lengthen the accounts receivable period.
C) shorten the accounts payable period.
D) decrease the cash cycle.
E) decrease the inventory turnover rate.

Question 15

Which one of these affects the length of the cash cycle but not the operating cycle?

A) Inventory period
B) Accounts payable period
C) Both the accounts receivable and inventory periods
D) Accounts receivable period
E) Both the accounts receivable and the accounts payable periods

Question 16

Which one of the following will increase the accounts payable period, all else held constant?

A) A decrease in the inventory period
B) An increase in the ending accounts payable balance
C) An increase in the cash cycle
D) A decrease in the operating cycle
E) An increase in the accounts payable turnover rate

Question 17

Which one of the following will decrease net working capital? Assume the current ratio is greater than 1.0.

A) Selling inventory at cost
B) Collecting payment from a customer
C) Paying a dividend to shareholders
D) Selling a fixed asset for less than book value
E) Paying a supplier for prior purchases

Question 18

Which one of these actions represents a use of cash?

A) Collecting a receivable
B) Paying employee wages
C) Selling inventory for cash
D) Obtaining a bank loan
E) Purchasing inventory on credit

Question 19

Which one of these actions will increase the operating cycle? Assume all else held constant.

A) Decreasing the payables period
B) Decreasing the receivables turnover rate
C) Increasing the payables period
D) Decreasing the average inventory level
E) Increasing the inventory turnover rate

Question 20

Which one of the following actions will tend to increase the accounts receivable period from its current 14 days?

A) Tightening the standards for granting credit to customers
B) Refusing to grant additional credit to any customer who pays late
C) Increasing the finance charges applied to all customer balances outstanding over 30 days
D) Granting discounts for cash sales
E) Eliminating the discount for early payment by credit customers

Question 21

Which one of these best describes a characteristic of a flexible financing policy?

A) All of a company's assets are financed with long-term debt.
B) Only long-term assets are financed with long-term debt.
C) Short-term financing will be used to finance seasonal peaks.
D) Inventory is purchased with cash.
E) Low levels of inventory are maintained.

Question 22

Which one of the following managers determines which customers must pay cash and which can charge their purchases?

A) Purchasing manager
B) Credit manager
C) Controller
D) Production manager
E) Payables manager

Question 23

Costs that increase as a firm acquires additional current assets are called ________ costs.

A) carrying
B) shortage
C) order
D) safety
E) trading

Question 24

The length of time between the sale of inventory and the collection of the payment for that sale is called the:

A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.

Question 25

Which one of the following managers determines when a supplier will be paid?

A) Controller
B) Payables manager
C) Credit manager
D) Purchasing manager
E) Production manager

Question 26

A flexible short-term financial policy:

A) maximizes cashouts.
B) increases shortage costs due to frequent cash-outs.
C) tends to decrease sales as compared to a restrictive policy.
D) incurs more carrying costs than a restrictive policy.
E) requires only a minimum investment in current assets.

Question 27

A firm with a flexible short-term financial policy will:

A) maintain a low balance in accounts receivables.
B) only have minimal amounts, if any, invested in marketable securities.
C) invest heavily in inventory.
D) have low cash balances.
E) have tight restrictions on granting credit to customers.

Question 28

Which one of these is indicative of a short-term restrictive financial policy?

A) Purchasing inventory on an as-needed basis
B) Granting credit to all customers
C) Investing heavily in marketable securities
D) Maintaining a large accounts receivable balance
E) Keeping inventory levels high

Question 29

A flexible short-term financial policy:

A) increases the need for long-term financing.
B) minimizes net working capital.
C) avoids bad debts by only selling items for cash.
D) maximizes fixed assets and minimizes current assets.
E) is most appropriate when carrying costs are high and shortage costs are low.

Question 30

Central Supply paid off an accounts payable for a toboggan it had purchased on credit three weeks ago. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the:

A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.

Question 31

The Lumber Mart recently replaced its management team. As a result, they are implementing a restrictive short-term financial policy in place of the flexible policy under which they had been operating. Which one of the following should the employees expect as a result of this policy change?

A) Increasing monthly sales as compared to the prior year
B) Greater inventory selection
C) Fewer out-of-stock occurrences
D) Loss of credit customers
E) More liberal credit terms

Question 32

The length of time that elapses between the day at item of inventory is purchased and the day that item sells is called the:

A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.

Question 33

The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the:

A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.

Question 34

If a company adheres to a restrictive short-term financial policy, then they will generally have:

A) little, if any, investment in marketable securities.
B) low inventory turnover rates.
C) liberal credit terms for customers.
D) few, if any, stockouts.
E) high cash balances.

Question 35

A company:

A) with a restrictive financing policy secures sufficient long-term financing to fund all its assets.
B) with a flexible financing policy frequently invests in marketable securities.
C) with a flexible financing policy tends to use short-term financing on an ongoing basis.
D) will tend to avoid short-term financing under both restrictive and flexible financing policies.
E) with seasonal sales must select flexible financing policies.

Question 36

The optimal investment in current assets for an active company occurs at the point where:

A) both shortage costs and carrying costs equal zero.
B) shortage costs are equal to zero.
C) carrying costs are equal to zero.
D) carrying costs exceed shortage costs.
E) shortage costs and carrying costs are equal.

Question 37

The length of time between the day an item is purchased from a supplier until the day that supplier is paid for that purchase is called the:

A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.

Question 38

Shortage costs are least associated with:

A) stockouts and cashouts.
B) lost customer goodwill.
C) disruptions of production schedules.
D) inventory ordering costs.
E) opportunity costs incurred by high levels of working capital.

Question 39

Costs that decrease as a company acquires additional current assets are called ________ costs.

A) carrying
B) shortage
C) debt
D) equity
E) payables

Question 40

Which one of the following statements is correct?

A) Seasonal needs are financed with short-term loans when companies adhere to a flexible financing policy.
B) A flexible financing policy tends to increase the risk of encountering financial distress.
C) Long-term interest rates tend to be less volatile than short-term rates.
D) Most companies tend to finance inventory with long-term debt.
E) Short-term interest rates are generally higher than long-term rates.

Question 41

A compensating balance:

A) is required when a company acquires any bank financing other than a line of credit.
B) is often used by banks as a means of rewarding their best credit customers.
C) decreases the cost of short-term bank financing.
D) only applies to zero-interest rate loans.
E) may be required even if a company never borrows funds.

Question 42

Assume each month has 30 days and a company has a 30-day accounts receivable period. During the second calendar quarter of the year, that company will collect payment for the sales it made during which of the following months?

A) February, March, and April
B) April, May and June
C) December, January, and February
D) January, February, and March
E) March, April, and May

Question 43

Which one of the following statements is correct concerning a company's cash balance?

A) Most firms attempt to maintain a zero cash balance at all times.
B) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.
C) On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance.
D) A cumulative cash deficit indicates a borrowing need.
E) The ending cash balance must equal the minimum desired cash balance.

Question 44

A cumulative cash deficit indicates a company:

A) has at least a short-term need for external funding.
B) is facing long-term financial distress.
C) will go out of business within the year.
D) is capable of funding all of its needs internally.
E) is using its cash wisely.

Question 45

With a compromise financial policy companies will:

A) borrow only long-term funds and refuse any loans that require compensating balances.
B) borrow short-term funds and also invest in marketable securities.
C) finance all of their assets with various short-term loans.
D) finance their seasonal asset peaks with short-term debt and the remainder of their assets with equity.
E) finance half of their fixed assets with long-term debt and half with short-term debt.

Question 46

Timko has a 90-day collection period and produces seasonal merchandise. Sales are lowest during the first calendar quarter of a year and the highest during the third quarter. The company maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters. This company is most apt to face a cash-out situation in:

A) the first quarter.
B) the second quarter.
C) the third quarter.
D) the fourth quarter.
E) any quarter with equal probabilities of occurrence.

Question 47

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as:

A) accounts receivable financing.
B) pledged financing.
C) capital funding.
D) daily funding.
E) capital financing.

Question 48

Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an example of a(n):

A) debenture.
B) line of credit.
C) banker's acceptance.
D) working loan.
E) inventory loan.

Question 49

Money deposited by a borrower with a bank in a low or non-interest-bearing account as a condition of a loan agreement is called a:

A) compensating balance.
B) secured credit deposit.
C) letter of credit.
D) line of cash.
E) pledge.

Question 50

Which type of arrangement is a hardware store most apt to use to finance its inventory?

A) Accounts receivable assignment
B) Blanket inventory lien
C) Trust receipt
D) Commercial paper
E) Field warehouse financing

Question 51

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a:

A) pro forma income statement.
B) sales projection.
C) cash budget.
D) receivables analysis.
E) credit analysis.

Question 52

The Harvester collects 55 percent of sales in the month of sale, 40 percent of sales in the month following the month of sale, and 5 percent of sales in the second month following the month of sale. During the month of April, they will collect:

A) 55 percent of February sales.
B) 5 percent of April sales.
C) 40 percent of March sales.
D) 5 percent of March sales.
E) 40 percent of February sales.

Question 53

Summertime Adventures is a seasonal firm that enjoys its highest sales during July and August. The company purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Which one of the following statements is supported by this information?

A) Inventory purchases will be highest during the months of July and August.
B) Inventory purchases will be highest during the months of May and June.
C) Payments to suppliers will be highest during the months of June and July.
D) Payments to suppliers will be highest during the months of July and August.
E) Payments to suppliers will be highest during the months of August and September.

Question 54

Which one of the following combinations is most apt to cause a company that is generally financially sound to have a negative net cash inflow for a particular quarter?

A) Low fixed expenses and level monthly sales
B) A one-time asset purchase and approaching high seasonal sales
C) Highly seasonal sales and a flexible financing policy
D) A flexible financing policy and level monthly sales
E) A large cash sale and low fixed expenses

Question 55

High Point Hotel (HPH) has $218,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Cross Town Bank. Which one of the following statements correctly describes this transaction?

A) HPH will immediately receive $218,000 and will have no further obligation related to these receivables.
B) HPH will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables.
C) Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays HPH a discounted value for its receivables.
D) Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays HPH a discounted price for the accounts collected after the normal collection period has elapsed.
E) HPH receives the full amount of its receivables upon assignment but must reimburse Cross Town Bank for any uncollected account.

Question 56

Which one of the following statements is correct?

A) The assignment of receivables involves selling accounts receivables at full price.
B) Lines of credit frequently require a cleanup period.
C) With maturity factoring, the borrower receives the loan amount immediately.
D) Commercial paper is short-term financing offered to highly rated corporations by major banks.
E) Credit card receivables funding is a relatively inexpensive method of borrowing on a short-term basis.

Question 57

Taylor Supply has made an agreement with its bank that allows it to borrow up to $10,000 at any time over the next year. This arrangement is called a(n):

A) floor loan.
B) open loan.
C) compensating balance.
D) line of credit.
E) bank note.

Question 58

The most common way to finance a temporary cash deficit is with a:

A) long-term secured bank loan.
B) short-term secured bank loan.
C) short-term issue of corporate bonds.
D) long-term unsecured bank loan.
E) short-term unsecured bank loan.

Question 59

An orange grower is most apt to use which type of financing for its crop?

A) Accounts receivable assignment
B) Blanket inventory lien
C) Trust receipt
D) Commercial paper
E) Field warehouse financing

Question 60

The primary difference between a line of credit and a revolving credit arrangement is the:

A) type of collateral used to secure the loan.
B) length of the credit period.
C) fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured.
D) fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured.
E) loan's classification as either a committed or a non-committed loan.

Question 61

Metal Products Co. has an inventory period of 94.2 days, an accounts payable period of 40.4 days, and an accounts receivable turnover rate of 17.6. What is the length of the cash cycle?

A) 71.40 days
B) 74.54 days
C) 96.28 days
D) 114.94 days
E) 108.28 days

Question 62

Rossiter's currently has a cash cycle of 43.4 days. Assume the operations are changed such that the receivables period decreases by 2.6 days, the inventory period by increases by 1.3 days, and the payables period increases by 3.4 days. What will be the length of the cash cycle after these changes?

A) 39.2 days
B) 45.5 days
C) 38.7 days
D) 41.3 days
E) 48.1 days

Question 63

The Mountain Top Shoppe has sales of $828,000, average accounts receivable of $64,100 and average accounts payable of $72,700. The cost of goods sold is equivalent to 68 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?

A) 69.31 days
B) 68.38 days
C) 47.13 days
D) 35.89 days
E) 36.97 days

Question 64

On average, Furniture & More is able to sell its inventory in 54.2 days and takes 65.3 days on average to pay for its purchases. Its average customer pays with a credit card which allows the company to collect its receivables in 2.9 days. Given this information, what is the length of operating cycle?

A) 57.1 days
B) 88.3 days
C) −8.2 days
D) 116.6 days
E) 122.4 days

Question 65

Peterson's Antiquities currently has a 32.6-day cash cycle. Assume the company changes its operations such that it decreases its receivables period by 3.1 days, increases its inventory period by 1.8 days, and increases its payables period by 2.2 days. What will the length of the cash cycle be after these changes?

A) 33.5 days
B) 36.1 days
C) 30.2 days
D) 29.1 days
E) 27.6 days

Question 66

Bradley's has an inventory turnover rate of 7.6, a payables turnover rate of 11.4, and a receivables turnover rate of 12.6. How long is the operating cycle?

A) 20.20 days
B) 76.99 days
C) 70.63 days
D) 30.13 days
E) 24.11 days

Question 67

Interior Designs has an inventory period of 84.6 days, an accounts payable period of 43.2 days, and an accounts receivable period of 41.7 days. Management is considering an offer from their suppliers to pay within 10 days and receive a discount of 2 percent. If the new discount is taken, the accounts payable period is expected to decline by 30.4 days. What will be the new operating cycle given the change in the payables period?

A) 95.9 days
B) 115.0 days
C) 97.4 days
D) 126.3 days
E) 139.1 days

Question 68

Wake-Up Coffee has projected next year's quarterly sales at $960, $890, $980, and $1,050 for Quarters 1 to 4, respectively. Accounts receivable at the beginning of the year are $212 and the collection period is 18 days. What is the amount of the accounts receivable balance at the end of Quarter 2? Assume a year has 360 days.

A) $212
B) $207
C) $178
D) $184
E) $167

Question 69

AC Corporation has beginning inventory of $11,062, accounts payable of $8,010, and accounts receivable of $7,844. The end of year values are $11,362 for inventory, $7,898 for accounts payable, and $8,029 for accounts receivable. Net sales are $109,100 and costs of goods sold are $56,220. How many days are in the cash cycle?

A) 47.7 days
B) 80.2 days
C) 55.8 days
D) 97.9 days
E) 67.8 days

Question 70

North Side Wholesalers has sales of $1,648,900. The cost of goods sold is equal to 71 percent of sales and the average inventory is $75,800. How many days on average does it take to sell the inventory?

A) 28.30 days
B) 23.63 days
C) 20.48 days
D) 33.28 days
E) 21.68 days

Question 71

Mid-Western Markets has sales of $1,389,400 and costs of goods sold of $892,700. Beginning inventory is $94,300 and ending inventory is $110,200. What is the inventory turnover rate?

A) 8.73 times
B) 10.78 times
C) 13.59 times
D) 11.37 times
E) 12.64 times

Question 72

Meryl Enterprises currently has an operating cycle of 76.4 days. The company is implementing some operational changes that are expected to increase the accounts receivable period by 2.2 days, decrease the inventory period by 5.3 days, and increase the accounts payable period by 1.5 days. What is the new operating cycle expected to be?

A) 78.0 days
B) 74.8 days
C) 73.3 days
D) 79.5 days
E) 71.8 days

Question 73

All of the following are benefits derived from short-term financial planning with the exception of:

A) having advance notice of when your firm should require external financing.
B) knowing for certain what your cash balance will be six months in advance.
C) knowing if excess funds should be available for investing.
D) being able to determine the approximate extent of time for which a loan is required.
E) having the ability to time capital expenditures in order to place the least financial burden possible on a firm.

Question 74

West Chester Automation has an inventory turnover of 9.1 and an accounts payable turnover of 10.6. The accounts receivable period is 32.8 days. What is the length of the cash cycle?

A) 35.67 days
B) 38.48 days
C) 41.02 days
D) 46.47 days
E) 48.81 days

Question 75

HG Livery Supply has a beginning accounts payable balance of $68,800 and an ending accounts payable balance of $72,700. Sales for the period were $942,800 and costs of goods sold were $534,200. What is the payables turnover rate?

A) 7.55 times
B) 8.39 times
C) 7.02 times
D) 13.33 times
E) 12.85 times

Question 76

Morning Star has credit sales of $1,032,800, costs of goods sold of $662,350, average accounts receivable of $86,300, and average accounts payable of $92,600. On average, how long does it take Morning Star's credit customers to pay for their purchases?

A) 11.97 days
B) 39.24 days
C) 30.50 days
D) 21.88 days
E) 19.56 days

Question 77

Tall Guys Clothing has a 30-day collection period. Sales for the next calendar year are estimated at $1,950, $2,100, $2,650 and $3,200, respectively, by quarter, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days.

A) The Quarter 2 collections will be $2,000.
B) The accounts receivable balance at the beginning of Quarter 4 will be $940.
C) The Quarter 3 collections will be $2,375.
D) The end of Quarter 4 accounts receivable balance will be $2,133.
E) The Quarter 4 collections will be $3,017.

Question 78

Auto Detailers has a book net worth of $29,700. Long-term debt is $4,800. Net working capital, other than cash, is $3,700 and fixed assets are $27,400. How much cash does the company have?

A) $3,900
B) $4,800
C) $4,300
D) $3,400
E) $3,700

Question 79

The Bear Rug has sales of $647,000. The cost of goods sold is equal to 66 percent of sales. Accounts receivable has a beginning balance of $53,400 and an ending balance of $49,600. How long on average does it take to collect the receivables?

A) 12.56 days
B) 29.05 days
C) 18.58 days
D) 20.44 days
E) 19.17 days

Question 80

New Products has sales of $749,500 and cost of goods sold of $368,600. Beginning inventory is $54,700 and ending inventory is $58,200. What is the length of the inventory period?

A) 15.01 days
B) 17.89 days
C) 55.90 days
D) 90.53 days
E) 113.67 days