Deck 18: Short-Term Finance and Planning

Question 1

A short-term loan secured by the borrower's inventory,either directly or via an intermediary,is called a(n):

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

Answer 1

inventory loan.

Question 2

The forecast of cash receipts and disbursements for the next planning period is called a:

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

Answer 2

cash budget.

Question 3

The length of time between the sale of inventory and the collection of cash from receivables is called the:

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

Answer 3

accounts receivable period.

Question 4

Which of the following are uses of cash?
I.marketable securities are sold
II.the amount of inventory on hand is increased
III.the firm takes out a long-term bank loan
IV.payments are paid on accounts payable

A)I and III only
B)II and IV only
C)I and IV only
D)II and III only
E)II, III and IV only

Question 5

Net working capital is defined as:

A)the current assets in a business.
B)the difference between current assets and current liabilities.
C)the present value of short-term cash flows.
D)the difference between all assets and liabilities.
E)None of the above.

Question 6

A short-term loan where the lender holds the borrower's receivables as security is called:

A)a compensating balance.
B)a letter of credit.
C)assigned receivables financing.
D)factored receivables financing.
E)a bond.

Question 7

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

A)Using cash to pay an accounts payable
B)Using cash to pay a long-term debt
C)Selling inventory at cost
D)Collecting an accounts receivable
E)Using a long-term loan to buy inventory

Question 8

A type of short-term loan where the borrower sells its receivables to the lender up-front,but at a discount to face value,is called:

A)a compensating balance.
B)assigned receivables financing.
C)a letter of credit.
D)factored receivables financing.
E)a bond.

Question 9

A prearranged,short-term bank loan made on a formal or informal basis,and typically reviewed for renewal annually,is called a:

A)letter of credit.
B)cleanup loan.
C)compensating balance.
D)line of credit.
E)roll-over.

Question 10

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

A)Selling inventory at a profit
B)Collecting an accounts receivable
C)Paying on a long-term debt
D)Selling a fixed asset for book value
E)Paying an accounts payable

Question 11

Costs of the firm that rise with increased levels of investment in its current assets are called _____ costs.

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

Question 12

The length of time between the payment for inventory and the collection of cash from receivables is called the:

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

Question 13

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

A)compensating balance.
B)cleanup loan.
C)letter of credit.
D)line of credit.
E)roll-over.

Question 14

A _____ issued by a bank is a promise by that bank to make a loan if certain conditions are met.

A)compensating balance
B)line credit
C)revolver
D)cleanup loan
E)letter of credit

Question 15

The length of time between the acquisition of inventory and its sale is called the:

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

Question 16

Costs of the firm that fall with increased levels of investment in its current assets are called _____ costs.

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

Question 17

The length of time between the acquisition of inventory and the collection of cash from receivables is called the:

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

Question 18

A prearranged credit agreement with a bank typically open for two or more years is called a:

A)letter of credit.
B)cleanup loan.
C)compensating balance.
D)line of credit.
E)revolving credit arrangement.

Question 19

Which one of the following is a source of cash?

A)An increase in accounts receivable
B)An increase in fixed assets
C)A decrease in long-term debt
D)The payment of a cash dividend
E)An increase in accounts payable

Question 20

The length of time between the acquisition of inventory by a firm and the payment by the firm for that inventory is called the:

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

Question 21

Which one of the following will not affect the operating cycle?

A)Decreasing the payables turnover from 7 times to 6 times
B)Increasing the days sales in receivables
C)Decreasing the inventory turnover rate
D)Increasing the average receivables balance
E)Decreasing the credit repayment times for the firm's customers

Question 22

The manager responsible for the accounting information concerning cash flows is the:

A)payables manager.
B)controller.
C)credit manager.
D)production manager.
E)purchasing manager.

Question 23

Which of the following actions will tend to decrease the inventory period?
I.discontinuing all slow-selling merchandise
II.selling obsolete inventory below cost just to get rid of it
III.buying raw materials only as they are needed in the manufacturing process
IV.producing goods on demand versus for inventory

A)I and III only
B)II and IV only
C)II, III and IV only
D)I, II and III only
E)I, II, III and IV

Question 24

Which one of the following will decrease the operating cycle?

A)Paying accounts payable faster
B)Discontinuing the discount given for early payment of an accounts receivable
C)Decreasing the inventory turnover rate
D)Collecting accounts receivable faster
E)Increasing the accounts payable turnover rate

Question 25

Which of the following are associated with a restrictive short-term financial policy?
I.large investments in marketable securities
II.liberal credit terms for customers
III.minimal cash balances
IV.minimal credit sales

A)I and III only
B)II and III only
C)II and IV only
D)III and IV only
E)I, II and III only

Question 26

Which one of the following will decrease the operating cycle?

A)Decreasing the speed at which inventory is sold
B)Decreasing the accounts receivable turnover rate
C)Decreasing the cash cycle by increasing the accounts payable period
D)Decreasing the days in accounts payable
E)Decreasing the days sales in inventory

Question 27

An increase in which one of the following is most apt to be an indicator of an accounts receivable policy that is too restrictive?

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

Question 28

An increase in which one of the following will decrease the cash cycle,all else equal?

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

Question 29

Which one of the following will increase the cash cycle?

A)Improving the cash discounts given to customers who pay their account early
B)Having a larger percentage of customers paying with cash instead of credit
C)Buying less raw materials to have on hand
D)Paying your suppliers earlier to receive the discount they offer
E)Ordering raw materials inventory only when you need it

Question 30

A restrictive short-term financial policy tends to:

A)grant credit to more customers.
B)reduce future sales more so than a flexible policy.
C)encourage credit sales over cash sales.
D)incur more carrying costs than a flexible policy does.
E)reduce order costs as compared to a more flexible policy.

Question 31

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

A)The cash cycle is equal to the operating cycle minus the inventory period.
B)A negative cash cycle is actually preferable to a positive cash cycle.
C)Granting credit to slower paying customers tends to decrease the cash cycle.
D)The cash cycle plus the accounts receivable period is equal to the operating cycle.
E)The most desirable cash cycle is the one that equals zero days.

Question 32

If you delay paying your suppliers by an additional ten days,then:

A)your payables turnover rate will increase.
B)your stock-out costs will rise.
C)the cash cycle will increase by ten days.
D)your operating cycle will lengthen by ten days.
E)you will require less bank financing of your operations.

Question 33

A restrictive short-term financial policy,as compared to a more flexible policy,tends to:
I.cause a firm to lose sales due to a lack of inventory on hand.
II.increase the sales of a firm due to the firm's credit availability and terms.
III.increase the probability that a firm will face a cash-out situation.
IV.increase the ability of a firm to charge premium prices.

A)I and III only
B)II and IV only
C)I and IV only
D)II and III only
E)I and II only

Question 34

ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer.The firm is now changing its policy and only producing a product when they receive an actual order from a customer.All else equal,this change will:

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

Question 35

Which one of the following managers is most likely in charge of establishing the accounts receivable policy?

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

Question 36

Flexible short-term financial policies tend to:

A)maintain large cash balances.
B)support few investments in marketable securities.
C)tightly restrict credit sales.
D)maintain low accounts receivable balances.
E)minimize the investment in inventory.

Question 37

The short-term financial policy that a firm adopts will be reflected in:

A)the size of the firm's investment in current assets.
B)the financing of current assets.
C)the financing of fixed assets.
D)Both A and B.
E)Both A and C.

Question 38

Which of the following actions will tend to decrease the accounts receivable period?
I.loosening the standards for granting credit to customers
II.increasing the discount for early payment by credit customers
III.increasing the finance charges applied to all customer balances outstanding over thirty days
IV.granting discounts for cash sales

A)I and III only
B)II and IV only
C)I, II and IV only
D)II, III and IV only
E)I, II, III and IV

Question 39

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

A)An increase in the cost of goods sold account value
B)A decrease in the operating cycle
C)An increase in the cash cycle
D)An increase in the ending accounts payable balance
E)A decrease in the average accounts payable balance

Question 40

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

A)A positive cash cycle is preferable to a negative cash cycle.
B)Increasing the accounts payable period increases the cash cycle.
C)The longer the cash cycle, the more likely a firm will need external financing.
D)The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E)Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.

Question 41

Which two of the following four conditions are most apt to cause a quarterly cash shortfall for a firm which is financially sound?
I.a relatively constant level of sales
II.periodic expenditures for major equipment purchases
III.a steady dependence on a constant level of external financing
IV.highly seasonal sales

A)I and III only
B)II and IV only
C)III and IV only
D)I, II and III only
E)II, III and IV only

Question 42

With a flexible policy with regard to short term financing,over a year a firm will have:

A)some funds to invest in marketable equity securities.
B)some short-term borrowing.
C)full coverage of permanent current assets.
D)Both A and B are correct.
E)A, B and C are correct.

Question 43

If your accounts receivable period is 30 days,you will collect payment for your _____ sales during the second quarter of a calendar year.

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

Question 44

A compensating balance:
I.is required when a firm acquires bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.represents an opportunity cost to the lending institution.
IV.is often used as a means of paying for banking services received.

A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)I, II and IV only

Question 45

Your firm collects 30% of sales in the month of sale,55% of sales in the month following the month of sale and 13% of sales in the second month following the month of sale.Given this,you will collect _____ sales during the month of June.

A)30% of May
B)55% of June
C)13% of May
D)55% of May
E)13% of March

Question 46

A flexible short-term financial policy:

A)increases the likelihood that a firm will face financial distress.
B)increases the probability that a firm will earn high returns on all of its assets.
C)advocates a smaller investment in net working capital than a restrictive policy does.
D)incurs an opportunity cost due to the rate of return that applies to short-term assets.
E)utilizes short-term financing to fund all of the firm's assets.

Question 47

Which of the following statements are correct concerning the cash balance of a firm?
I.Most firms plan on maintaining a minimum cash balance at all times.
II.The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum cash balance retained by the firm.
III.The cumulative cash surplus at the end of March is used as the beginning cash balance for April when you are compiling a projected monthly cash balance report.
IV.A negative cumulative cash surplus indicates a borrowing need by the firm.

A)I and III only
B)II and IV only
C)I and IV only
D)II and III only
E)I and II only

Question 48

Assets presented on the balance sheet are in order of accounting liquidity.Accounting liquidity refers to:

A)the risk of receiving payment on its accounts.
B)ability and time it takes to convert assets to cash.
C)how much inventory a brewer keeps.
D)the ability to sell its product.
E)None of the above.

Question 49

Which of the following is not included in current assets?

A)Cash
B)Inventories
C)Accounts receivable
D)Accrued wages
E)All of the above are included in current assets.

Question 50

Which of the following is not included in current liabilities?

A)Accounts payable
B)Prepaid insurance
C)Accrued expenses payable
D)Taxes payable
E)Notes payable

Question 51

The most common means of financing a temporary cash deficit is a:

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

Question 52

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

A)length of the time period covered by the loan agreement.
B)type of collateral used to secure the loan.
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)line of credit is a long-term financing agreement while the revolving credit arrangement is a short-term financing agreement.

Question 53

Which of the following are benefits of compiling a short-term financial plan?
I.Knowing ahead of time when your firm will probably require external financing.
II.Being able to estimate how long of a time period your firm might need a loan.
III.Being able to determine when your firm can best afford to spend funds on a capital expenditure.
IV.Knowing when your firm should have excess funds that can be invested.

A)I and III only
B)I, II and IV only
C)II, III and IV only
D)I, II and III only
E)I, II, III and IV

Question 54

The appropriate amount of short-term borrowing is determined by:

A)maturity hedging.
B)cash reserves.
C)relative interest rates.
D)All of the above.
E)None of the above.

Question 55

If the average accounts receivable that a firm holds decreases without any decrease in credit sales,the operating cycle will:

A)decrease because days sales outstanding decreases.
B)have an unknown effect.
C)stay the same because of no sales change.
D)stay the same because accounts receivable are not in the operating cycle.
E)stay the same because cash collections are sooner and it will affect the cash cycle only.

Question 56

Which one of the following statements is correct?

A)A farmer generally uses a type of financing that employs trust receipts to provide financing during the growing season.
B)Floor plan arrangements are most applicable to large, easily identifiable types of inventory.
C)A drug store is more apt to have a financing arrangement involving trust receipts than one involving a blanket lien.
D)A third-party inventory manager is generally involved with the lender and the borrower in a floor plan arrangement.
E)A direct loan from a bank is generally less expensive than a loan involving commercial paper.

Question 57

Sources of cash do not include:

A)increases in notes payable.
B)increases in cash flow.
C)increases in taxes payable.
D)increases in borrowing from banks.
E)decreases in accounts payable.

Question 58

A manufacturing firm has a 90 day collection period.The firm produces seasonal merchandise and thus has the least sales during the first quarter of a year and the highest level of sales during the third quarter of a year.The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters.The firm 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, equally.

Question 59

A cumulative cash deficit indicates that a firm:

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

Question 60

A flexible short-term financial policy:

A)is associated with firms where the carrying costs are considered to be less than the shortage costs.
B)applies mostly to firms where the shortage costs tend to be less than the carrying costs.
C)applies only to firms that strictly limit its credit sales.
D)tends to decrease the amount of current assets held by a firm.
E)is designed to utilize short-term external financing to fund all of the seasonal increases in current assets.

Question 61

A firm currently has a 35 day cash cycle.Assume that the firm changes its operations such that it decreases its receivables period by 4 days,increases its inventory period by 2 day and decreases its payables period by 3 days.What will the length of the cash cycle be after these changes?

A)31 days
B)33 days
C)35 days
D)36 days
E)37 days

Question 62

Bilt Rite,Inc.has sales of $610,000.The cost of goods sold is equal to 70% of sales.The beginning accounts receivable balance is $21,000 and the ending accounts receivable balance is $25,000.How long on average does it take the firm to collect its receivables?

A)13.76 days
B)14.09 days
C)21.07 days
D)25.98 days
E)26.52 days

Question 63

Your firm has sales of $628,000 and cost of goods sold of $452,000.At the beginning of the year,your inventory was $31,000.At the end of the year,the inventory balance was $33,000.What is the inventory turnover rate?

A)11.23 times
B)12.56 times
C)14.13 times
D)19.63 times
E)29.06 times

Question 64

Cash cycle equals:

A)inventory period plus accounts receivable period.
B)change in net working capital period.
C)operating cycle plus accounts payable period.
D)operating cycle plus inventory period.
E)None of the above.

Question 65

A use of cash can be determined by:

A)an increase in retained earnings.
B)an increase in an asset.
C)a decrease in a liability.
D)Both B and C.
E)Both A and B.

Question 66

ABC,Inc.has a beginning receivables balance on January 1^st of $430.Sales for January through April are $350,$250,$330 and $240,respectively.The accounts receivable period is 60 days.How much did the firm collect in the month of March? Assume that a year has 360 days.

A)$240
B)$250
C)$330
D)$350
E)$430

Question 67

Martinique and Son have a 60 day collection period.Sales for the next calendar year are estimated at $1,200,$1,100,$2,300 and $1,800,respectively,by quarter starting with the first quarter of the year.Given this information,which one of the following statements is correct? Assume that a year has 360 days.

A)The firm will collect $1,133 in Quarter 2.
B)The accounts receivable balance at the beginning of Quarter 4 will be $767.
C)The firm will collect $367 from Quarter 2 sales in Quarter 3.
D)The firm will have an accounts receivable balance of $1,200 at the end of the year.
E)The firm will collect a total of $1,967 in Quarter 4.

Question 68

A firm has an inventory turnover rate of 16,a receivables turnover rate of 21 and a payables turnover rate of 11.How long is the operating cycle?

A)37.00 days
B)40.19 days
C)42.87 days
D)63.08 days
E)73.37 days

Question 69

Stoney Brooke,Inc.has sales of $990,000 and cost of goods sold of $540,000.The firm had a beginning inventory of $36,000 and an ending inventory of $46,000.What is the length of the inventory period?

A)15.24 days
B)15.61 days
C)21.19 days
D)27.71 days
E)32.38 days

Question 70

True Blue Stores had a beginning accounts payable balance of $56,900 and an ending accounts payable balance of $62,800.Sales for the period were $670,000 and costs of goods sold were $468,000.What is the payables turnover rate?

A)6.98 times
B)7.82 times
C)8.13 times
D)11.19 times
E)11.78 times

Question 71

A firm currently has a 45 day cash cycle.Assume that the firm changes its operations such that it increases its receivables period by 2 days,decreases its inventory period by 1 day and increases its payables period by 3 days.What will the length of the cash cycle be after these changes?

A)38 days
B)39 days
C)41 days
D)43 days
E)45 days

Question 72

A firm has sales of $720,000.The cost of goods sold is equal to 70% of sales.The firm has an average inventory of $6,500.How many days on average does it take the firm to sell its inventory?

A)3.30 days
B)4.71 days
C)67.29 days
D)77.54 days
E)110.77 days

Question 73

Weson,Inc.has sales of $462,000,costs of goods sold of $308,000 and average accounts receivable of $54,900.How long does it take its credit customers to pay for their purchases?

A)36.09 days
B)38.63 days
C)41.23 days
D)43.37 days
E)57.95 days

Question 74

Your firm currently has an operating cycle of 64 days.You are analyzing some operational changes which are expected to decrease the accounts receivable period by 4 days and decrease the inventory period by 3 days.The accounts payable turnover rate is expected to increase from 7 to 9 times per year.If all of these changes are adopted,what will your firm's new operating cycle be?

A)47 days
B)51 days
C)54 days
D)57 days
E)60 days

Question 75

Wilson,Inc.has an inventory turnover rate of 14,an accounts payable period of 54 days and an accounts receivable period of 37 days.What is the length of the cash cycle?

A)-7.33 days
B)-2.00 days
C)2.00 days
D)7.33 days
E)9.07 days

Question 76

The cash cycle is defined as the time between:

A)cash disbursements and cash collection.
B)selling the product and posting the accounts receivable.
C)selling the product and collecting the accounts receivable.
D)the arrival of inventory in stock and when the cash is collected from receivables.
E)the arrival of inventory and cash collection.

Question 77

Jaxson and Sons has an inventory period of 33 days,an accounts payable period of 41 days and an accounts receivable period of 27 days.Management is considering offering a 5% discount if its credit customers pay for their purchases within 10 days.If the new discount is offered the accounts receivable period is expected to decline by 13 days.If the new discount is offered,the operating cycle will decrease from _____ days to _____ days.

A)19; 6
B)60; 47
C)87; 74
D)101; 88
E)101; 91

Question 78

LoDo,Inc.has sales of $642,000 and average accounts payable of $36,400.The cost of goods sold is equivalent to 75% of sales.How long does it take LoDo to pay its suppliers?

A)11.46 days
B)13.45 days
C)20.69 days
D)27.59 days
E)31.85 days

Question 79

Drefus,Inc.has an inventory turnover of 16 and an accounts receivable turnover of 10.The accounts payable period is 51 days.What is the length of the cash cycle?

A)8.31 days
B)9.57 days
C)10.07 days
D)11.23 days
E)12.79 days

Question 80

Dallas and More (D&M)sells its inventory in 87 days on average.Its average customer charges their purchase on a credit card whereby payment is received in ten days.On the other hand,D&M takes 56 days on average to pay for its purchases.Given this information,what is the length of D&M's operating cycle?

A)26 days
B)36 days
C)66 days
D)97 days
E)143 days