Chapter 18

Cash Reserves

- the flexible financing policy implies surplus cash and little short term borrowing

Types of inventory loans

-Blanket inventory lien -Trust receipt -field warehouse financing

Activities that decrease cash

-Decreasing long-term debt -Decreasing equity (repurchasing some stock) -Decreasing current liabilities -Increasing current assets other than cash -Increasing fixed assets

Activities that Increase Cash

-Increasing long-term debt -Increasing equity (selling some stock) -Increasing current liabilities -Decreasing current assets other than cash -Decreasing fixed assets

Characteristics of non-SEC registered commercial paper

-Issues by large, highly rated firms -Issued directly by the firm -Interest often below prime rate

Short-term financial policies that are flexible with regard to current assets include such actions as:

-Keeping large balances of cash and marketable securities -Making large investments in inventory -Granting liberal credit terms, which results in a high level of accounts receivable

Restrictive short-term financial policies with regard to current assets include such actions as:

-Keeping low cash balances and making little investment in marketable securities -Making small investments in inventory -Allowing few or no credit sales, thereby minimizing accounts receivable

Cash Outflows

-Payments of AP -Wages, Taxes, and other expenses -Capital expenditures -Long-term financing expenses

The short-term financial policy that a firm adopts will be reflected in at least two ways:

-The size of the firm's investment in current assets -The financing of current assets

Two kinds of shortage costs

-Trading, or order, costs -Costs related to lack of safety reserves

Two types of short-term borrowing

-Unsecured borrowing -Secured Borrowing

short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with _____.

-capital budgeting -dividend policy -capital structure

Payables period

365 / payables turnover

Inventory period

365/inventory turnover

Receivables period (days' sales in receivables OR average collection period)

365/receivables turnover

Cash budget

A forecast of cash receipts and disbursements for the next planning period.

Line of credit

A formal (committed) or informal (noncommitted) prearranged, short-term bank loan.

Cash Flow Timeline

A graphical representation of the operating cycle and the cash cycle.

Letters of Credit

A letter issued by a bank allowing the bearer to withdraw a specific amount of money from the bank or its branches.

Accounts Receivable Financing

A secured short-term loan that involves either the assignment or the factoring of receivables.

Inventory loans

A secured short-term loan to purchase inventory.

Cash Collections

Beginning Accounts Receivable + 1/2 x sales

Net Working Capital = _____ + Other current assets - Current Liabilities

Cash

_______ = long-term debt + equity + Current liabilities - Current Assets (other than cash) - fixed assets

Cash

Effective interest rate

Interest paid/amount available

Compensating balance

Money kept by the firm with a bank in low-interest or non-interest-bearing accounts as part of a loan agreement.

Cash Cycle Formula

Operating Cycle - Accounts Payable Period

Relative interest rates

Short term interest rates are usually lower than long term rates. (On average, it is more costly to rely on long-term borrowing as compared to short-term borrowing)

What is the primary concern in short-term finance?

The firm's short-run operating and financing activities

The Operating Cycle

The period between the acquisition of inventory and the collection of cash from receivables.

Accounts payable period

The time between receipt of inventory and payment for it.

Accounts Receivable Period

The time between sale of inventory and collection of the receivable.

Inventory Period

The time it takes to acquire and sell inventory.

maturity hedging

a strategy where a firm tries to match the maturities of its assets and liabilities

The higher the ________ ratio is, the greater the firm's accounting return on assets (ROA), and return on equity (ROE)

asset turnover

The shorter the _______, the lower is the firm's investment in inventories and receivables. As a result, the firm's total assets are lower, and total asset turnover is higher

cash cycle

Inventory turnover

cost of goods sold/average inventory

shortage costs

costs that fall with increases in the level of investment in current assets

Carrying costs

costs that rise with increases in the level of investment in current assets

The two types of accounts receivable financing are ___ and ____.

factoring and assignment

Net working capital + _______ = Long-term debt + Equity

fixed assets

Operating cycle formula

inventory period + accounts receivable period

Asset turnover

net sales/ average total assets.

commercial paper

short-term unsecured debt issued by large corporations

Net Cash Inflow

the difference between cash collections and cash disbursements

trade credit

the practice of buying goods and services now and paying for them later

Cash Cycle

the time between cash disbursement and cash collection