Ch 19 Short-Term Financial Planning

What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000 higher than ending, and $20,000 was collected? A. $19,000 B. $20,000 C. $21,000 D. $24,000

A. $19,000 Ending accounts receivable = beginning accounts receivable + sales - collections $4,000 = $5,000 + sales -$20,000 $19,000 = sales

A firm's inventory and accounts payable periods are 80 and 42 days, respectively. How long can the firm's receivables period be in order to have no longer than a 65-day cash conversion cycle? A. 27 days B. 38 days C. 57 days D. 103 days

A. 27 days Cash conversion cycle = inventory period + receivable period - accounts payable period 65≥ 80 days + AR period - 42 days 65≥ 38 + AR 27≥ AR period

Which of the following statements about total capital requirement is LEAST likely to be correct for a profitable firm? A. Requirements remain constant over time. B. Seasonal variations are often experienced. C. The trend is often upward-sloping. D. A portion of working capital is permanent.

A. Requirements remain constant over time.

The following information is for the month of January. I. Beginning accounts receivable = $40 million II. Sales for January = $160 million III. Collections for January = $145 million Find the ending accounts receivable for January. A. $25 million B. $55 million C. $75 million D. $265 million

B. $55 million 40+160-145 = 55

A firm has $50 million and $60 million credit sales during the first two quarters of the year. Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter. What will be the total collection for the firm in the second quarter? A. $55 million B. $58 million C. $88 million D. $98 million

B. $58 million Q1 sales collections = 50*.2 = 10 Q2 collections = 60*.8 = 48 Total Q2 collections = 10+48 = 58

Which of the following is not a source of cash? A. Net income B. Repayment of a bank loan C. Reduction in accounts receivable D. Depreciation

B. Repayment of a bank loan

What motivation is provided for managers NOT to follow the relaxed strategy of long- versus short-term financing? A. Transaction costs are required to continually obtain financing. B. Short-term investment income is often unattractive. C. Investment opportunities must frequently be ignored. D. Long-term financing has burdensome tax consequences.

B. Short-term investment income is often unattractive.

If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the inventory period and payable period the same, then: A. cash conversion cycle will increase. B. cash conversion cycle will decrease. C. the firm's investment in working capital will be minimized. D. unable to determine from the information provided.

B. cash conversion cycle will decrease.

A firm that follows a "relaxed strategy" toward the total capital requirement will be a: A. short-term borrower. B. short-term lender. C. long-term lender. D. long-term borrower.

B. short-term lender.

What is the annual cost of goods for a firm, with accounts payable period of 35 days and average accounts payable of $600,000. A. $5,753,425 B. $6,171,429 C. $6,257,143 D. $17,142,857

C. $6,257,143 35 = 600,000/(Annual COGS/365) 35(AnnualCOGS /365) = 600,000 Annual COGS/365 = 600,000/35 = 17142.86 Annual COGS = 17142.86*365 = $6,257,143

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable. The net effect of these transactions on the firm's net working capital is a decrease of: A. $1,700,000. B. $1,000,000. C. $700,000. D. $300,000.

C. $700,000. Payment of dividend reduces cash balance by $700,000 and reduces net working capital by the same amount. Repayment of notes payable reduces both cash and notes payable, so that the effect on net working capital is zero.

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance. The effective annual rate for the customer will be: A. 21.00%. B. 21.20%. C. 23.14%. D. 37.93%.

C. 23.14%. 2ndICONV -> Nom = 21 C/Y = 12 CPT EFF = 23.14%

What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days? A. 10 days B. 50 days C. 70 days D. 130 days

C. 70 days Cash Conversion Cycle = Inventory period + AR period - AP Period = 60+40 - 30= 70 days

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 2% discount and the average collection period is 1 month? A. 19.40% B. 24.00% C. 26.53% D. 27.40%

D. 27.40% $(100-98)/$98 = 2.04% per 2-month period (1.0204)^12 -1 = 27.40%

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months? A. 19.40% B. 24.00% C. 26.53% D. 27.75%

D. 27.75% $(100-96)/$96 = 4.17% per 2-month period (1.0417)^6 - 1 = 27.75%

What is the payable period for a firm with average accounts payable of $4 million and annual cost of goods sold of $44 million. A. 20.0 days B. 30.0 days C. 35.6 days D. 33.2 days

D. 33.2 days = 4/(44/365) = 33.2

A firm sells its $1,000,000 receivables to a factor for $960,000. Average collection period is one month. The effective annual rate is: A. 27.43%. B. 48.00%. C. 60.10%. D. 63.21%.

D. 63.21%. Factor Discount = 1,000,000*.04/960,000 = 0.0417 Effective rate = (1+ 0.0417)^12 -1 = 0.6321

What is the inventory period for a firm with an annual cost of goods sold of $8 million, $1.5 million in inventory, and a cash conversion cycle of 75 days? A. 6.56 days B. 18.75 days C. 53.33 days D. 68.44 days

D. 68.44 days Inventory Period = avg inventory / (annual COGS/365) = 1.5/(8/365) = 68.44 days

Calculate the accounts receivable period for a firm with an annual sales of $10 million and average accounts receivable of $2 million. A. 18.25 days B. 20.00 days C. 51.00 days D. 73.00 days

D. 73.00 days = 2/(10/365) = 73 days

Firms that continually invest in nontrivial amounts of marketable securities may be guilty of: A. excessive short-term borrowing. B. not matching their sources and uses of cash. C. incurring excessive shortage costs. D. not maximizing shareholder returns.

D. not maximizing shareholder returns.

Which of the following is least likely to be correct for a firm that repeatedly stretches its payables? A. The firm may receive more favorable status from suppliers due to its volume of purchases. B. The firm may reduce its explicit short-term interest expense. C. The cost of forgone discounts may exceed the cost of bank credit. D. The firm may be labeled as a credit risk.

A. The firm may receive more favorable status from suppliers due to its volume of purchases.

Which of the following is LEAST likely to be correct about the factoring of receivables? A. The selling firm bears the risk of default. B. The higher the perceived quality of the receivables, the lower the discount rate. C. The discount is paid by the selling firm in the form of reduced sales price. D. Factoring may be the cheapest method of avoiding a cash flow problem.

A. The selling firm bears the risk of default.

42. The safety margin kept by the bank on loan against liquid assets is called: A. a haircut. B. a line of credit. C. factoring. D. field warehousing.

A. a haircut.

A line of credit would be considered: A. an agreement to borrow up to a specific total amount on demand from a bank. B. a short-term unsecured loan with minimum interest expense. C. a secured loan to be amortized over three to five years. D. a long-term, permanent source of funding.

A. an agreement to borrow up to a specific total amount on demand from a bank.

When product demand is high, firms following a "middle of the road policy" for long- versus short-term financing will: A. borrow short term. B. borrow long term. C. hold marketable securities. D. sell marketable securities.

A. borrow short term.

When the length of the financing is directly related to the life of the asset being financed, the firm is said to follow a: A. policy of maturity matching. B. restrictive financing strategy. C. matched depreciation strategy. D. minimum working capital strategy.

A. policy of maturity matching.

How high can accounts receivable be allowed to grow before the firm's receivables period exceeds 50 days if annual sales equal $5 million and the cash conversion cycle equals 75 days? A. $342,466 B. $684,932 C. $1,027,397 D. $1,712,329

B. $684,932 AR Period = Avg AR / (annual sales/365) 50= Avg AR / (5 million/365) Avg AR = 50*13,698.63 = $684,932

During the year the following changes were observed. I. Inventory period increased by 12 days. II. Receivables period decreased by 6 days. III. Accounts payable period increased by 4 days. Find the net change in cash conversion cycle. A. -10 days B. +2 days C. +10 days D. +14 days

B. +2 days ∆cash conversion cycle = (∆inventory period + ∆receivables period) - ∆accounts payable period ∆cash conversion cycle = [12 + (-6)] -4 = 2 days

Your accountant suspects a mistake in the computation of the payables period, which has been reported at 54.75 days. Calculate the correct payables period, given the following: annual sales = $1,200,000, annual cost of goods sold = $700,000, average accounts payable = $105,000. A. 31.94 days B. 54.75 days C. 179.58 days D. 212.92 days

B. 54.75 days AP Period = Avg AP / (Avg COGS/365) = 105,000/(700,000/365) = 54.75

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? I. Current assets increase by $170,000. II. Current liabilities decrease by $60,000. A. Increase by $110,000 B. Increase by $230,000 C. Decrease by $110,000 D. Decrease by $230,000

B. Increase by $230,000 Change in net working capital = change in current assets - change in current liabilities = $170,000 - (-$60,000) = $230,000

If the statement of sources and uses of cash shows a decrease in cash balance, which of the following changes might have eliminated that decrease? A. Increase in cash dividends paid B. Increase in accounts payable C. Increase in accounts receivable D. Increase in inventories

B. Increase in accounts payable

Which of the following would not be included as a source of short-term financing? A. Line of credit B. Increase in the minimum operating cash balance C. Sale of marketable securities D. Stretching of accounts payable

B. Increase in the minimum operating cash balance

Which of the following situations will improve the current ratio if it is initially less than 1.0? A. Using cash to repay accounts payable B. Purchasing inventory on credit terms C. Selling finished goods inventory on credit D. Purchasing marketable securities for cash

B. Purchasing inventory on credit terms

Which of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter? A. The sales level has decreased. B. The sales level has increased. C. The rate of collections has decreased. D. The rate of collections has increased.

B. The sales level has increased.

A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the receivables prove insufficient to cover the debt. In this case, the: A. lender bears the risk of default. B. firm bears the risk of default. C. default risk is shared between lender and firm. D. insurance carrier will bear the risk.

B. firm bears the risk of default.

The principle of "matched maturities" in finance refers to: A. finding sources of funds with the longest maturity, in order to avoid liquidity crises. B. funding long-term assets with long-term sources, and vice versa. C. using as much short-term financing as possible due to the lower cost of interest. D. buying marketable securities when demand is high and borrowing short-term when demand is low.

B. funding long-term assets with long-term sources, and vice versa.

Although commercial paper is unsecured, the companies that issue this short-term security are: A. typically known to repay all defaults. B. large firms of top credit quality. C. small firms of top credit quality. D. firms that have government-sponsored guarantees for the debt.

B. large firms of top credit quality.

Bank lines of credit must be judiciously requested because the lines often: A. accrue interest regardless of whether funds are borrowed. B. require payment of a commitment fee to establish. C. appear as a liability on the firm's balance sheet. D. have a negative impact on the firm's credit history.

B. require payment of a commitment fee to establish.

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million? A. 14.59 days B. 46.25 days C. 70.41 days D. 136.25 days

C. 70.41 days Inventory period = 3/(18/365) = 60.833 AR Period = 40 AP Period = 1.5/(18/365) = 30.417 = 60.833+40+30.417 = 70.41 days

Ignoring the risk of theft, cash balances cannot spoil, yet managers are concerned with carrying costs. Why? A. Embezzlement is a real risk in most firms. B. Higher balances require additional supervisors. C. Cash balances are idle and face an opportunity cost. D. All of these.

C. Cash balances are idle and face an opportunity cost.

If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable? A. Net working capital increases. B. Net working capital decreases. C. Current ratio increases. D. Current ratio decreases.

C. Current ratio increases. Current Ratio = Current Assets / Current Liabs Current ratio = 2/1 = 2 Pay .5 cash to reduce .5 liabs New Current Ratio = 1.5/.5 = 3

Which of the following would NOT be considered a use of cash? A. Dividends B. Decreased accounts payable C. Depreciation D. Increased accounts receivable

C. Depreciation

Which of the following would act to reduce the carrying costs of inventory? A. The inventory is capable of spoiling. B. The inventory will rapidly go out of style. C. General interest rates decrease in the economy. D. General interest rates increase in the economy.

C. General interest rates decrease in the economy.

Which of the following would not be included among the costs of carrying inventory? A. Obsolescence B. Opportunity cost of capital C. Raw material cost D. Risk of pilferage

C. Raw material cost

Which of the following is not typically a characteristic of commercial paper borrowing? A. Maturity is short-term. B. Banks are not the lenders. C. The loans are secured. D. Borrowers have high credit quality.

C. The loans are secured.

Issuing additional long-term debt of $5 million and buying new long-term assets worth $5 million will result in a net cash flow of: A. $5 million. B. $10 million. C. Zero. D. $15 million.

C. Zero.

The goal of managing working capital, such as inventory, should be to minimize the: A. costs of carrying inventory. B. opportunity cost of capital. C. aggregate of carrying and shortage costs. D. amount of spoilage or pilferage.

C. aggregate of carrying and shortage costs.

Managers are alerted to projected cash shortages by way of the: A. statement of sources and uses of cash. B. pro forma balance sheet. C. cash budget. D. monthly bank statements.

C. cash budget.

The time interval between paying for raw materials and collecting on sales of finished goods is known as the: A. inventory cycle. B. matching cycle. C. cash conversion cycle. D. accounts receivable cycle.

C. cash conversion cycle.

Trade credit is created when: A. customers return unacceptable goods. B. final consumers purchase goods on credit. C. companies purchase goods on credit. D. current assets exceed current liabilities.

C. companies purchase goods on credit.

As for the preparation of cash budgets, capital expenditures are: A. not included because these items are depreciated. B. included as sources of operating cash. C. included as uses of cash and make the budget lumpy. D. traditionally offset as a use of cash by interest income.

C. included as uses of cash and make the budget lumpy.

In "field warehousing" the inventory is kept by the: A. borrowing firm. B. lending institution. C. independent warehousing company. D. firm and the lender jointly.

C. independent warehousing company.

When financial managers take action to minimize the carrying costs of current assets, they: A. are likely to maximize profits. B. also consider spoilage costs. C. may increase costs due to shortages. D. engage in the matching of maturities.

C. may increase costs due to shortages.

For most corporations, net working capital is: A. negative during the inventory period of the cash conversion cycle. B. equal to the amount of current assets. C. positive to provide liquidity during the cash conversion cycle. D. present only during slack periods of the year.

C. positive to provide liquidity during the cash conversion cycle.

When managers are continually short-term lenders they are said to follow a: A. middle-of-the-road financing strategy. B. restrictive financing strategy. C. relaxed financing strategy. D. permanent working-capital strategy.

C. relaxed financing strategy.

Which of the following is correct for a firm that reduces its accounts receivable balance from the previous quarter? A. Collections exceeded beginning receivables balance. B. Sales exceeded collections. C. Beginning receivables balance exceeded sales. D. Collections exceeded sales.

D. Collections exceeded sales.

What happens to a firm whose uses of cash exceed its sources of cash during an accounting period? A. It borrows on a short-term basis. B. It declares a net loss on the income statement. C. It experiences an increase in cash balance. D. It experiences a decrease in cash balance.

D. It experiences a decrease in cash balance.

Which of the following is more likely for a firm practicing the "relaxed" strategy of long- versus short-term borrowing at the height of sales demand? A. It will borrow heavily on a short-term basis. B. It will invest heavily in marketable securities. C. It will borrow heavily on a long-term basis. D. Long-term financing will approximate capital requirements.

D. Long-term financing will approximate capital requirements.

Which of the following statements is correct concerning marketable securities on a firm's balance sheet? A. All are U.S. government obligations. B. All earn interest income. C. All are without price risk. D. Not all are guaranteed against loss.

D. Not all are guaranteed against loss.

When a firm finances long-term assets with short-term sources of funding, it: A. reduces the risk of cash shortage. B. will have lower interest expense. C. improves the leverage ratio. D. ignores the principle of matched maturities.

D. ignores the principle of matched maturities.

Customers may change firms when faced with minimal inventory selection. Sales lost in this manner illustrate the: A. costs of carrying inventory. B. lack of customer loyalty. C. need to maintain a high current ratio. D. impact of shortage costs.

D. impact of shortage costs.

The longer the firm's accounts payable period, the: A. longer the firm's cash conversion cycle. B. shorter the firm's inventory period. C. more the delay in the accounts receivable period. D. less the firm must invest in working capital.

D. less the firm must invest in working capital.

Managers who "stretch their payables" are attempting to: A. repay more recent charges prior to early charges. B. improve their current ratio prior to preparation of financial statements. C. offer finished goods at a discount for repayment. D. obtain a longer period of short-term financing.

D. obtain a longer period of short-term financing.

Field warehousing can be an important source of: A. additional storage space for cash-strapped firms. B. investing for those who follow the "relaxed cash strategy." C. cash management for those who factor receivables. D. short-term financing with low risk to the lender.

D. short-term financing with low risk to the lender.