Deck 18: Short-Term Finance and Planning

Question 1

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.

Answer 1

inventory loan.

Question 2

Which one of the following equals the operating cycle?

A)cash cycle plus 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

Answer 2

inventory period plus the accounts receivable period

Question 3

Which one of the following 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
D)purchasing inventory on credit
E)selling inventory at a profit on credit

Answer 3

selling inventory at a profit on credit

Question 4

Which one of the following increases 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

Question 5

The length of time between the day a firm purchases an item from its 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 6

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 7

Taylor Supply has made an agreement with its bank that it can 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 8

Which of the following are sources of cash?
I.decrease in inventory
II.increase in accounts receivable
III.repayment of a bond
IV.sale of preferred stock

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

Question 9

Central Supply purchased a toboggan for inventory this morning and paid cash for it.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 10

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 11

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 12

The length of time that elapses between the day a firm purchases an inventory item 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 13

Money deposited by a borrower with the 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 credit.
E)pledge.

Question 14

Costs that decrease as a firm acquires additional current assets are called _____ costs.

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

Question 15

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 16

A graphical representation of the operating and cash cycles is called a(n):

A)operating chart.
B)cash flow time line.
C)production flow line.
D)component chart.
E)working time line.

Question 17

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

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

Question 18

Which of the following will increase the operating cycle?
I.increasing the inventory turnover rate
II.increasing the payables period
III.decreasing the receivable turnover rate
IV.decreasing the inventory level

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

Question 19

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

A)selling inventory at cost
B)collecting payment from a customer
C)paying a payment on a long-term debt
D)selling a fixed asset for book value
E)paying a supplier for the purchase of an inventory item

Question 20

Which of the following are uses of cash?
I.collecting a receivable
II.increasing inventory
III.obtaining a bank loan
IV.paying a supplier for previous purchases

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

Question 21

If you pay your suppliers five 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 increase.
E)the accounts receivable period will decrease.

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

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 24

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)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 25

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

A)The longer the cash cycle, the more likely a firm will need external financing.
B)Increasing the accounts payable period increases the cash cycle.
C)A positive cash cycle is preferable to a negative 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 26

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 27

Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 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 thirty days
D)granting discounts for cash sales
E)eliminating the discount for early payment by credit customers

Question 28

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 29

Which of the following determines the length of the operating cycle?
I.cash cycle
II.inventory period
III.accounts payable period
IV.accounts receivable period

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 30

Which of the following statements is (are)correct?
I.An increase in the accounts payable period shortens the cash cycle.
II.The cash cycle is equal to the operating cycle minus the inventory period.
III.A negative cash cycle is preferable to a positive cash cycle.
IV.The cash cycle plus the accounts receivable period is equal to the operating cycle.

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

Question 31

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 32

A flexible short-term financial policy:

A)increases a firm's 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 for a firm with relatively high carrying costs and relatively low shortage costs.

Question 33

Which of the following will increase the cash cycle,all else constant?
I.increasing the inventory period
II.decreasing the accounts receivable turnover rate
III.increasing the accounts payable period
IV.decreasing the accounts receivable period

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

Question 34

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 needed for 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 35

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 36

Which of the following are associated with a restrictive short-term financial policy?
I.little,if any,investment in marketable securities
II.liberal credit terms for customers
III.low cash balances
IV.increasing inventory levels

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

Question 37

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 38

Which one of the following 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 39

The Lumber Mart recently replaced its management team.As a result,the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating.Which of the following should the employees expect as a result of this policy change?
I.reduction in sales due to stock outs
II.greater inventory selection
III.decreased sales due to the new accounts receivable credit policy
IV.decreased investment in marketable securities

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

Question 40

Metal Designs,Inc.,historically produced products for inventory.Now,the firm only produces a product when it receives an actual order 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 41

Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound?
I.fixed expenses
II.fixed asset purchases
III.flexible financing policy
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

The optimal investment in current assets for an operating firm 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)the total costs of holding current assets is minimized.

Question 43

Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in products related to water sports.The firm purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date.Sales are highest during July and August.Currently,Jill is preparing the cash disbursements section of the firm's cash budget.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 44

A national firm has sales of $729,000 and cost of goods sold of $478,000.At the beginning of the year,the inventory was $37,000.At the end of the year,the inventory balance was $41,000.What is the inventory turnover rate?

A)12.26 times
B)12.78 times
C)14.22 times
D)18.56 times
E)19.70 times

Question 45

A flexible short-term financial policy:
I.increases shortage costs due to frequent cash-outs.
II.tends to increase sales as compared to a restrictive policy.
III.requires a sizeable investment in current assets.
IV.incurs more carrying costs than a restrictive policy.

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

Question 46

A compensating balance:
I.is required when a firm acquires any bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.may be required even if a firm never borrows funds.
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)II, III, and IV only

Question 47

Shortage costs include which of the following?
I.disruption of production schedules
II.inventory ordering costs
III.lost customer goodwill
IV.brokerage costs

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

Question 48

Which of the following are benefits derived from short-term financial planning?
I.having advance notice of when your firm will require external financing
II.being able to determine the extent of time for which a loan is required
III.having the ability to time capital expenditures in order to place the least financial burden possible on a firm
IV.knowing for certain what your cash balance will be six months in advance

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

Question 49

The most common means of financing a temporary cash deficit is 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 50

High Point Hotel (HPH)has $165,000 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 $165,000 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 51

A cumulative cash deficit indicates a firm:

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 52

Which one of the following statements is correct?

A)Seasonal needs are financed externally when firms 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 firms tend to finance inventory with long-term debt.
E)Short-term interest rates are generally higher than long-term rates.

Question 53

Which one of the following statements is correct?

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

Question 54

Assume each month has 30 days and a firm has a 60-day accounts receivable period.During the second calendar quarter of the year,that firm will collect payment for the sales it made during which of the following months?

A)October, November, and December
B)November, December, and January
C)December, January, and February
D)January, February, and March
E)February, March, and April

Question 55

Which one of the following statements is correct concerning the cash balance of a firm?

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 56

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)classification as either a committed or a noncommitted loan.

Question 57

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 fourth 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 with equal probabilities of occurrence.

Question 58

Which one of the following statements is correct?

A)The assignment of receivables involves selling the firm's 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 59

The Harvester collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:

A)60 percent of February sales.
B)15 percent of April sales.
C)60 percent of March sales.
D)15 percent of March sales.
E)25 percent of February sales.

Question 60

Denver Interiors,Inc.,has sales of $836,000 and cost of goods sold of $601,000.The firm had a beginning inventory of $36,000 and an ending inventory of $47,000.What is the length of the inventory period?

A)19.21 days
B)20.89 days
C)25.20 days
D)30.53 days
E)33.69 days

Question 61

Your firm has an inventory turnover rate of 14,a payables turnover rate of 8,and a receivables turnover rate of 19.How long is your firm's operating cycle?

A)45.06 days
B)45.28 days
C)45.63 days
D)53.13 days
E)53.78 days

Question 62

The Athletic Sports Store has a beginning receivables balance on January 1 of $410.Sales for January through April are $440,$480,$690,and $720,respectively.The accounts receivable period is 60 days.How much did the firm collect in the month of April? Assume a year has 360 days.

A)$410
B)$440
C)$480
D)$690
E)$720

Question 63

The Dog House expects sales of $560,$650,$630,and $610 for the months of May through August,respectively.The firm collects 20 percent of sales in the month of sale,70 percent in the month following the month of sale,and 8 percent in the second month following the month of sale.The remaining 2 percent of sales is never collected.How much money does the firm expect to collect in the month of August?

A)$615
B)$628
C)$633
D)$639
E)$643

Question 64

Metal Products Co.has an inventory period of 53 days,an accounts payable period of 68 days,and an accounts receivable turnover rate of 18.What is the length of the cash cycle?

A)3.00 days
B)5.28 days
C)26.28 days
D)71.00 days
E)73.28 days

Question 65

Forest Gardens,Inc.,has a beginning receivables balance on February 1 of $730.Sales for February through May are $720,$780,$820,and $850,respectively.The accounts receivable period is 30 days.What is the amount of the April collections? Assume a year has 360 days.

A)$720
B)$780
C)$790
D)$820
E)$850

Question 66

HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100.Sales for the period were $610,000 and costs of goods sold were $458,000.What is the payables turnover rate?

A)8.15 times
B)8.39 times
C)9.02 times
D)9.86 times
E)10.85 times

Question 67

On average,Furniture & More is able to sell its inventory in 27 days.The firm takes 87 days on average to pay for its purchases.On the other hand,its average customer pays with a credit card which allows the firm to collect its receivables in 4 days.Given this information,what is the length of operating cycle?

A)31 days
B)38 days
C)45 days
D)56 days
E)62 days

Question 68

West Chester Automation has an inventory turnover of 17.5 and an accounts payable turnover of 11.The accounts receivable period is 36 days.What is the length of the cash cycle?

A)5.67 days
B)23.68 days
C)41.00 days
D)52.00 days
E)58.81 days

Question 69

Nadine's Boutique has a 30 day accounts payable period.The firm has expected quarterly sales of $1,100,$1,400,$1,600,and $2,100,respectively,for next year.The quarterly cost of goods sold is equal to 68 percent of the next quarter's sales.The firm has a beginning accounts payable balance of $550 as of Quarter 1.What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume a year has 360 days.

A)$1,195
B)$1,208
C)$1,247
D)$1,315
E)$1,337

Question 70

The Blue Star has sales of $387,000,costs of goods sold of $259,000,average accounts receivable of $12,100,and average accounts payable of $12,600.How long does it take for the firm's credit customers to pay for their purchases?

A)7.67 days
B)9.24 days
C)11.41 days
D)11.88 days
E)13.81 days

Question 71

North Side Wholesalers has sales of $948,000.The cost of goods sold is equal to 68 percent of sales.The firm has an average inventory of $23,000.How many days on average does it take the firm to sell its inventory?

A)12.30 days
B)13.02 days
C)16.48 days
D)26.35 days
E)29.68 days

Question 72

Davis and Davis have expected sales of $490,$465,$450,and $570 for the months of January through April,respectively.The accounts receivable period is 28 days.What is the accounts receivable balance at the end of March? Assume a year has 360 days.

A)$420
B)$426
C)$440
D)$450
E)$482

Question 73

A company currently has a 51 day cash cycle.Assume the firm changes its operations such that it decreases its receivables period by 2 days,increases its inventory period by 3 days,and increases its payables period by 4 days.What will the length of the cash cycle be after these changes?

A)42 days
B)45 days
C)48 days
D)49 days
E)51 days

Question 74

Interior Designs has an inventory period of 51 days,an accounts payable period of 38 days,and an accounts receivable period of 32 days.Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount.If the new discount is taken,the accounts payable period is expected to decline by 26 days.If the new discount is taken,the operating cycle will be _____ days.

A)52
B)62
C)78
D)83
E)91

Question 75

Tall Guys Clothing has a 45 day collection period.Sales for the next calendar year are estimated at $2,100,$1,600,$2,500 and $2,300,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 firm will collect $800 in Quarter 2.
B)The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
C)The firm will collect $2,000 in Quarter 3.
D)The firm will have an accounts receivable balance of $2,300 at the end of the year.
E)The firm will collect a total of $2,400 in Quarter 4.

Question 76

Breakwater Aquatics has a 45 day accounts receivable period.The estimated quarterly sales for this year,starting with the first quarter,are $6,800,$7,100,$8,200,and $6,400,respectively.What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days.

A)$3,400
B)$3,550
C)$6,950
D)$7,100
E)$7,650

Question 77

Merryl Enterprises currently has an operating cycle of 59 days.The firm is analyzing some operational changes,which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days.The accounts payable turnover rate is expected to increase from 42 to 46 times per year.If all of these changes are adopted,what will the firm's new operating cycle be?

A)51 days
B)54 days
C)56 days
D)59 days
E)65 days

Question 78

Peterson's Antiquities currently has a 31 day cash cycle.Assume the firm changes its operations such that it decreases its receivables period by 2 days,decreases its inventory period by 3 days,and decreases its payables period by 4 days.What will the length of the cash cycle be after these changes?

A)22 days
B)23 days
C)29 days
D)30 days
E)31 days

Question 79

The Bear Rug has sales of $811,000.The cost of goods sold is equal to 63 percent of sales.The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000.How long on average does it take the firm to collect its receivables?

A)17.26 days
B)17.78 days
C)18.58 days
D)20.44 days
E)29.77 days

Question 80

The Mountain Top Shoppe has sales of $512,000,average accounts receivable of $31,400 and average accounts payable of $24,800.The cost of goods sold is equivalent to 71 percent of sales.How long does it take The Mountain Top Shoppe to pay its suppliers?

A)21.76 days
B)22.38 days
C)24.90 days
D)25.89 days
E)26.67 days