Deck 16: Short-Term Financial Planning

Question 1

Gilbert and Sons has sales for the year of $24 800 and cost of goods sold of $14 200.The firm carries an average inventory of $3100 and an average accounts payable balance of $2400.What is the inventory period?

A)80 days
B)85 days
C)75 days
D)78 days
E)83 days

Answer 1

80 days

Question 2

Allison Adventures has the following estimated sales:
Sales
Purchases are equal to 65 per cent of the following quarter's sales.The accounts receivable period is 30 days and the accounts payable period is 45 days.Assume that there are 30 days in each month.Allison Adventures will purchase _____ of goods in the third quarter and pay their suppliers _____ during the third quarter.

A)$2080;$2178
B)$1885;$2178
C)$2275;$2178
D)$1885;$1983
E)$2080;$1983

Answer 2

$1885;$1983

Question 3

Which one of the following statements is correct concerning the accounts payable period?

A)managers generally prefer a shorter accounts payable period than a longer one
B)extending the accounts payable period effectively decreases the cash needs of a firm
C)increasing the accounts payable turnover rate increases the accounts payable period
D)an increase in the accounts payable period will increase the operating cycle,all else equal
E)the accounts payable period is equal to the cost of goods sold divided by the average accounts payable

Answer 3

extending the accounts payable period effectively decreases the cash needs of a firm

Question 4

Which one of the following statements concerning a firm's sources and uses of cash is correct given the following account values?

A)The long-term debt is a use of cash of $200.
B)The accounts receivable is a use of cash of $50.
C)The common stock is a source of cash of $200.
D)The accounts payable is a source of cash of $200.
E)The inventory is a source of cash of $100.

Question 5

Bluewater,Inc.has the following estimated quarterly sales for next year.The accounts receivable period is 60 days.What is the expected accounts receivable balance at the end of the third quarter? Assume that each month has 30 days.
Sales

A)$367
B)$733
C)$867
D)$800
E)$433

Question 6

The inventory period is equal to:

A)the inventory turnover rate divided by 365
B)sales divided by the average inventory divided into 365
C)sales divided by the average inventory multiplied by 365
D)365 multiplied by the average inventory divided by the cost of goods sold
E)the cost of goods sold divided by the inventory turnover rate

Question 7

Carter United has annual sales of $509 000 and cost of goods sold of $267 000.The profit margin is 4 per cent and the accounts payable period is 32 days.What is the average accounts payable balance?

A)$23 408.22
B)$33 617.17
C)$27 001.01
D)$44 624.66
E)$18 887.16

Question 8

The operating cycle commences when:

A)inventory is purchased
B)a sale is made
C)a receivable is created
D)payment is made for inventory purchased on credit
E)an accounts payable is paid

Question 9

The Hot Potato Co.operates several mobile units which contract with construction companies to provide hot food and beverages to their workers.The company has annual sales of $167 200.Cost of goods sold average 45 per cent of sales and the profit margin is 6 per cent.The average accounts receivable balance is $23 400.On average,how long does it take Hot Potato to collect from its construction customers?

A)56 days
B)61 days
C)48 days
D)59 days
E)51 days

Question 10

The Moose Co.currently has 81 days in its cash cycle and 136 days in its operating cycle.The firm purchases all of its inventory from one supplier.This supplier has offered a 5 per cent discount to The Moose Co.if it will pay for its purchases within 10 days.If The Moose Co.changes it payables policy and pays in 10 days,the firm's cash cycle will be _____ days.

A)91
B)131
C)114
D)126
E)103

Question 11

The Windslow Co.has the following estimated sales:
Sales
Purchases are equal to 55 per cent of the following quarter's sales.What is the amount of anticipated purchases which will be made in the third quarter?

A)$810
B)$990
C)$900
D)$770
E)$1,030

Question 12

Short-term uncommitted loan facilities are often used to finance temporary needs,such as:

A)all of the given answers
B)none of the given answers
C)paying trade creditors to earn any trade discounts
D)one-off transactions
E)meeting salary payments when the collection of trade receivables is slow

Question 13

The time between the payment for inventory and the receipt of cash from the sale of that inventory is called the:

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

Question 14

Which of the following are considered to be shortage costs?
I.the cost of placing an order
II.production disruptions caused by the inventory
III.lost sales due to limited selection
IV.opportunity cost associated with highly liquid assets

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

Question 15

Factoring involves the lender buying the accounts receivable assets of the borrowing company at a discount to their face value.If the factoring company can recover future bad debt from the borrowing company,this is called:

A)a disintermediated type of factoring
B)conventional factoring
C)assignment of receivables
D)factoring on a notification basis
E)unconventional factoring

Question 16

Baker Industries offers credit terms of 2/20,net 60 to Charlie Co.Charlie Co.has an inventory period of 15 days and an operating cycle of 45 days.Given this,which of the following statements are correct?
I.The credit terms of Baker Industries are too restrictive.
II.If Charlie Co.forgoes the discount on its purchases,it will have a negative cash cycle.
III.Baker Industries is financing the accounts receivable of Charlie Co.
IV.If Charlie Co.is delinquent in its payment,Baker Industries should be concerned.

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

Question 17

The cash cycle is equal to:

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

Question 18

At the end of June 2007,TB Cave & Associates had an average of $45 000 in accounts receivable.Credit sales were $292 500.The company factors all of its receivables immediately at a 1.50% discount.For simplification,consider that all of the accounts receivable are expected to be collected in full.What is the company's effective cost of borrowing on this source of financing?

A)13.48%
B)11.34%
C)12.56%
D)12.01%
E)10.32%

Question 19

The __________ facility is a major source of short-term finance for a corporation.It allows the company,without any previous notice,to put its bank account into ______,up to an agreed limit.

A)promissory notes rollover;deficit
B)overdraft;deficit
C)commercial bills rollover;surplus
D)revolving;deficit
E)revolving;surplus

Question 20

Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.

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

Question 21

Which of the following costs will tend to increase if a firm switches from a flexible short-term policy to a restrictive short-term financial policy?
I.lost sales due to out-of-stock items
II.inventory warehousing costs
III.cash-outs
IV.total annual order costs

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

Question 22

Which one of the following actions is indicative of a restrictive short-term financial policy?

A)expanding the number of inventory items carried
B)minimising the cash balances held by the firm
C)granting increasing amounts of credit to customers
D)investing relatively large amounts in marketable securities
E)increasing the firm's investment in the current accounts

Question 23

Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?

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

Question 24

By definition,an inventory loan is which one of the following types of loan?

A)unsecured long-term loan
B)secured long-term loan
C)trust receipt loan
D)secured short-term loan
E)unsecured short-term loan

Question 25

Moore & Moore has just finished projecting its expected cash receipts and expenditures for next year.What is this projection called?

A)cash budget
B)balance sheet
C)receivables schedule
D)compromise policy
E)operating projection

Question 26

Accounts receivable financing is the term used to describe which of the following types of loans which involve either the assignment or the factoring of a firm's accounts receivables?

A)unsecured short-term loan
B)secured long-term loan
C)bailment financing
D)unsecured long-term loan
E)secured short-term loan

Question 27

The amount of time that a firm holds inventory in stock is referred to as which one of the following?

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

Question 28

The accounts receivable period is the time that elapses between the _____ and the _____.

A)sale of inventory;payment to supplier
B)sale of inventory;billing to customer
C)sale of inventory;collection of the receivable
D)purchase of inventory;payment to the supplier
E)purchase of inventory;collection of the receivable

Question 29

Which one of the following best describes a line of credit?

A)long-term prearranged,committed bank loan
B)short-term prearranged bank loan that can be either committed or noncommitted
C)short-term loan secured by accounts receivable
D)long-term,prearranged,noncommitted bank loan
E)short-term loan secured by inventory

Question 30

Which of the following costs tend to rise when a firm switches from a restrictive financial policy to a flexible financial policy?
I.restocking costs
II.lower prices to offset limited selection
III.storage costs
IV.current-asset opportunity costs

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

Question 31

Generally speaking,which of the following situations will occur if a seasonal company adopts a compromise financial policy?
I.periods where short-term financing is required
II less long-term debt than if the firm followed a restrictive financial policy
III.periods of excess funds which can be invested in short-term marketable securities
IV.lower investment in fixed assets than if the firm adopted a flexible financial policy

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

Question 32

Which one of the following statements is correct?

A)Firms should generally finance all of their assets with long-term debt.
B)A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
C)Short-term borrowing is generally more expensive than long-term borrowing.
D)Long-term interest rates tend to be more volatile than short-term interest rates.
E)Firms that follow restrictive financial policies can generally avoid short-term debt financing.

Question 33

Tri-City Grocers is a chain of grocery stores that just hired a new CFO.Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm?
I.easing the credit terms given to customers
II.increasing the amount of inventory carried by each grocery store
III.borrowing funds to keep more cash available for store operations
IV.decreasing the firms' investments in marketable securities

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

Question 34

Which one of the following defines the cash cycle?

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

Question 35

Which one of the following is most indicative of a flexible short-term financial policy?

A)relatively low level of liquidity
B)high ratio of current assets to sales
C)low level of net working capital
D)high ratio of short-term debt to long-term debt
E)relatively small investment in current assets

Question 36

Which one of the following is directly related to increases in a firm's current assets?

A)carrying costs
B)re-order costs
C)restocking costs
D)out-of-stock events
E)shortage costs

Question 37

Which one of the following statements is true,all else constant?

A)An increase in the inventory turnover rate will decrease the cash cycle.
B)Paying a supplier within the discount period,rather than waiting until the end of the normal credit period,decreases the cash cycle.
C)The cash cycle can never be negative.
D)A decrease in the accounts receivable turnover rate decreases the cash cycle.
E)The payables period must be shorter than the receivables period.

Question 38

A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will have?
I.uncollectable accounts receivables
II.work stoppages for lack of raw materials
III.carrying costs
IV.obsolete or out-of-date inventory

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

Question 39

Which of the following are inversely related to increases in a firm's current assets?
I.re-order costs
II.shortage costs
III.restocking costs
IV.carrying costs

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

Question 40

Black Water Mills is operating at its optimal point.Which one of the following conditions exists given this firm's operating status?

A)carrying costs are equal to zero
B)both carrying costs and shortage costs are at their minimum levels
C)carrying costs exceed shortage costs
D)shortage costs are equal to zero
E)shortage costs equal carrying costs

Question 41

Which one of the following statements related to a cash budget is correct?

A)The cumulative surplus is computed prior to adjusting for the minimum cash balance.
B)Financially healthy firms can have a negative quarterly net cash inflow.
C)Firms generally set the minimum cash balance at zero for planning purposes.
D)Capital expenditures are treated as a cash inflow on a cash budget.
E)A positive net cash inflow for a period indicates the cash disbursements exceed the cash collections for the period.

Question 42

Which of the following are sources of cash?
I.decreasing accounts receivable
II.increasing inventory
III.increasing accounts payable
IV.increasing common stock

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

Question 43

Which one of the following activities is a source of cash?

A)decreasing accounts receivable
B)decreasing long-term debt
C)repurchasing shares of stock
D)increasing fixed assets
E)increasing inventory

Question 44

Which one of the following will increase the operating cycle?

A)decreasing the days' sales in inventory
B)decreasing the accounts payable turnover rate
C)decreasing the inventory turnover rate
D)decreasing the accounts payable period
E)increasing the accounts receivable turnover rate

Question 45

Which one of the following actions will decrease the operating cycle?

A)granting customers more time to pay for their credit purchases
B)increasing inventory
C)paying suppliers faster
D)buying more inventory with cash rather than with credit
E)lessening the production time needed to manufacture a good for sale

Question 46

Manly Manufacturing Pty Ltd is compiling a cash balance projection by quarter for next year.Which one of the following adjustments to this projection will decrease the cumulative surplus?

A)increasing the dividend per share on the firm's outstanding ordinary shares
B)decreasing the accounts receivable period by changing the firm's credit policy effective the first of next year
C)reducing payroll costs from its current projection amount
D)receiving more favourable credit terms from the firm's suppliers
E)refinancing the firm's long-term debt at a lower interest rate

Question 47

Which type of financing is generally used by new car dealers to finance their inventories?

A)trade credit financing
B)blanket inventory lien arrangement
C)committed line of credit
D)bailment financing
E)field warehousing financing

Question 48

The operating cycle is equal to which one of the following?

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

Question 49

Which one of the following is a use of cash?

A)increasing accounts payable
B)issuing new shares of stock
C)decreasing inventory
D)decreasing fixed assts
E)increasing accounts receivable

Question 50

A committed line of credit:

A)is a loan arrangement for a stated period of time which is free of all costs and fees other than the actual interest paid on the funds borrowed.
B)provides greater assurance than a noncommitted credit line that funds will be available when needed by a firm.
C)guarantees that any funds borrowed during a stated period of time will be charged the lowest rate of interest the lending bank offers to any of its customers.
D)guarantees that a set amount of funds will be available to a firm for a stated period of time regardless of events that might occur during that time period.
E)is a guarantee that a bank will purchase a firm's accounts receivables at full value.