Intermediate Financial Management Quiz 2
What is one way to increase cash
Accepting credit from the supplier
The operating cycle equals the sum of the
Inventory period and the accounts receivable period
Some examples of short term flexible financing policies include
Large cash balances and large investments in inventory
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)
Line of credit
Current assets are listed on the balance sheet in what order?
Liquidity order
For US corporations, current assets have fallen from 50% of total assets to 40% of total assets because of
More efficient cash and inventory management
The balance sheet identity says that
Net working capital plus fixed assets equals long term debt plus equity
The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the
Operating cycle
Examples of shortage costs
Order costs and safety reserve costs
What will decrease NWC?
Paying off long term debt
What is one use of cash?
Purchase of inventory
Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as
Receivables financing
Another term for short term financial management is
Working capital management
Examples of activities that increase cash?
decreasing fixed assets and increasing long term debt
Sources of cash can involve
increasing liabilities accounts and increasing equity
Generally used for security for short term loans
inventory and accounts receivables
Trade credit
one source of short term funds, involves taking more time to pay payables
The financing of current assets is measured by the proportion of
short term debt and long term debt used to finance current assets
Examples of cash dispersants
wages and taxes, capital expenditures, and payments of accounts payable
The length of time between the sale of inventory and the collection of the payment for that sale is called the
Accounts receivable period
The operating cycle is composed of which periods?
Accounts receivable period, and inventory period
An increase in which of the following is an indicator that the accounts receivable policy is becoming more restrictive?
Accounts receivable turnover rate
Examples of a current liability
Accrued wages, accrued taxes, expense accruals, and accounts payable
Long-term financing is concerned with
Capital structure, capital budgeting, and dividend policy
What are sources of cash?
Decrease in inventory and sale of preferred stock
What action will increase the operating cycle?
Decreasing the receivable turnover rate
Unsecured bank loans are
Short term
If the investments in accounts receivables is lower then
Total assets are lower
Non-committed lines of credit are
informal arrangements and generally specify the max amount that can be borrowed
Steps of the operating cycle
order inventory, sell finished product, and then get cash
Typical inventory loans
Blanket inventory loans, field warehouse financing, trust financing
The opportunity costs of holding liquid assets are called
Carrying costs
The time between paying cash for inventory and receiving cash for selling inventory is called the
Cash Cycle
Current assets are
Cash and other assets that can be turned into cash within a year
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
Compensating balance
Deposits a firm must keep with the bank as the part of a loan agreement are called
Compensating balances
Short-term finance is concerned with
Current assets and current liabilities
What will increase the operating cycle?
Decreasing the receivables turnover rate
Which one of the following actions will tend to increase the accounts receivable period from its current 34 days?
Eliminating the discount for early payment by credit customers
Current liabilities are
Firm obligations that will require re-payment within the operating period if it is longer than a year
Inventory loans
Loans financed with inventory used as collateral
Short term financial managers involved with selling on credit
Marketing manager, credit manager, and the controller
What is one example of a source of cash?
Sale of inventory
Total asset turnover is defined as
Sales divided by total assets
Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0.
Selling inventory at a profit on credit
Two major elements of a short term financing policy are
The size of the firm's investment in current assets and the financing of current assets
The optimal investment in current assets for an operating firm is at the point where
The total cost of holding current assets is minimized
A restrictive short term financing policy includes
a small investment in net working capital and possible shortage of cash
The gap between short term cash inflows and cash outflows is filled with
borrowing and maintaining a liquidity reserve
One disadvantage of a flexible financing policy is that
long term rates are usually higher than short term
Commercial paper is an example of
short term debt security