Chapter 16
short term finance is concered w current assets and current liabilities, whereas long term finance is concerned with: (pick all that apply) -accruals policy -dividend policy -capital budgeting -capital structure -inventory mgmt
-dividend policy -capital budgeting -capital structure
the gap between short term cash inflows and outflows can be filled by: (pick all that apply) - maintaining a liquidity reserve - borrowing - decreasing the payables period - increasing the inventory period
- maintaining a liquidity reserve - borrowing
either stock out or cash out occur when a firm: (pick all that apply) -runs out of inventory to sell - has excess inventory - runs out of available cash - has excess cash
- runs out of inventory to sell - runs out of availoable cash
the 2 types of accts rcvbl are:
1. assignment 2. factoring
which activities increase cash? (pick all that apply) - increasing long term debt - decreasing fixed assets - increasing fixed assets - decreasing current liabilities
- increasing long term debt - decreasing fixed assets
for US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% of total asssets today primarily bcuz of more efficient: (pick all that apply) -fixed asset mgmt -inventory mgmt -financial markets -cash mgmt
- inventory mgmt. - cash mgmt
place steps in correct order of operating cycle from 1st to last: -Collect cash from the sale -Sell the finished product -Order inventory
1. Order inventory 2. Sell the finished product 3. Collect cash from the sale
what increases the cash cycle? (pick all that apply) - a longer rcvbls period - a longer payables period - a longer inventory period
- a longer rcvbls period - a longer inventory period
which are generally used as security for short term secured loans? (pick all that apply) - accts rcvbl -common stock -fixed assets -inventory
- accts rcvbl - inventory
non-committed lines of credit: (pick all that apply) - are formal legal arrangements - require commitment fees - generally specific a max. amount that can be borrowed - are informal arrangements
- are informal arrangements - generally specify a max. amount that can be borrowed
which are examples of cash disbursements? (pick all that apply) - capital expenditures - payments of accnts payable - depreciation&amortization - wages&taxes
- capital expenditures - payments of AP -Wages&taxes
a flexible short term financing strategy implies: (pick all that apply) - a relatively large pool of marketable securities - depreciation deficits - a small investment in rcvbls - cash surpluses
- cash surpluses - a relatively large pool of marketable securities
which represents a use of cash? (pick all that apply) - accts payable increases - paying off a loan - repurchasing stock - accts rcvbl increases
-paying off a loan -repurchasing stock -accts rcvbl increases
the cash budget allows the firm to identify (pick all that apply) - short term financial opportunities -short term financial needs -needed depreciation values -dividends to pay out
-short term financial opportunities -short term financial needs
being low on cash can force a firm to:
1 default on debt 2 sell marketable securities 3 borrow money
the main problemS with maturity mismatching (financing long term assets with short term debt) are that it:
1 is risky 2 requires frequent refinancing
what are the following managers responsible for: 1 cash mgr 2 credit mgr 3 purchasing mgr 4 payable mgrs
1 marketable securities 2 accounts rcvbl 3 inventory 4 accts payable
what are the 2 major elements of a firm's short term financial policy?
1. the size of the firms investment in current assets 2. the financing of current assets
what is the inventory period is the inventory turnover in 10 times?
365/10 = 36.5 days
If inventory is acquired on day zero and paid for on day 40, and then the product is sold and cash is collected for the sale on day 100, the cash cycle is how many days?
60
If a firm has an operating cycle of 100 days and an AP period of 40 days, then its cash cycle is:
60 days
the diff. between the operating cycle and the accts payable period is the ____
Cash cycle
the basic balance sheet identity can be written as Net Working Capital + Fixed Assets = Long Term Debt + ____
Equity
shortage costs are those that _________ when the level of investment in current assets is high
Fall
what does maturity hedging involve?
Financing fixed assets with long term financing and inventories with short term financing
a product begins its accnt life as inventory and is converted to a _____ when it's sold on credit
Receivable
under which type of inventory loan does the lender have a lien against all of the borrower's inventory?
a blanket inventory lien
the optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at:
a minimum
although flexible short term financial policies are often most costly, they result in:
a reduced probability of financial distress
unsecured bank loans are: a. short term b. nor the most common way to finance caash deficits c. very insecure for both borrower and lender
a. short term
the ____ period is the time between the receipt of inventory and anctually paying for that inventory
accounts payable
the time taken to collect on credit sales is called the _____ period
accts rcvbl
commercial paper is an example of which of these? a. capital market security b. debt security c. equity security
b. debt security
dividend payments belong in which category? a. wages, taxes and other exp. b. capital expenditures c. long term financing exp. d. accts payable
c. long term financing exp.
the oppostunity costs of holding current assets are called _____ costs
carrying
the diff. between cash collections and cash disbursements is the predicted _____
net cash inflow
The balance sheet identity says:
net working capital plus fixed assets equals long term debt plus equity
carrying costs involve: (pick all that apply) - cash costs - opportunity costs - overhead costs - depreciation costs
opportunity costs
short term cash flows are unsynchronized bcuz the payment for raw materials usually doesn't match the cash flow from:
product sales
ideally, short term assets are financed with
short term liabilities
those firm activities that increase cash are called:
sources of cash
which decrease cash? (pick all that apply) -decreasing fixed assets -increasing fixed assets - decreasing equity -increasing current liabilities
- increasing fixed assets - decreasing equity
Short term finance is primarily concerned with:
-current liabilities -current assets
Which of these activities are primary to short term finance? -financing activities -operating activities -selling stock and bonds -investing in fixed assets
-operating activities -financing activities
if the rcvbls turnover ratio is 36.5, then the rcvbls period is how many days?
10
if the inventory period is 40 days and the AR period is 60 days, then the operating cycle is ____ daYS
100
if a firm has an inventory period of 100 days and an AP period of 42 days, then their operating cycle is:
142 days
if starting Accts rcvbl are $100, credit sales are $200, and cash collections are $50, then ending accts rcvbl are:
250
If the payables turnover is 14 times, what is the payables period?
26 days
when COGS is $9 million and average inventory is $3 million, then what is the inventory turnover?
3
between the 1960's and the present, current liabilities have risen from about 20% of total liabilities to almost ____ percent
30
a restrictive short term financial policy implies a _______ proportion of short term debt relative to long term debt
High
other important sources of short term financing (besides secured and unsecured borrowing) for a company are: (pick all that apply) - asset-backed bonds - trade credit - commercial paper - short term stocks
- trade credit - commercial paper
under a factored receivables arrangement: (pick all that apply) - collection of the rcvble is the factor's responsibility -rcvbls are sold at a discount -collection of the rcvbls is the responsibility of the seller -rcvbls are sold at face value
-collection of rcvbls is the factor's responsibility -rcvbls are sold at a discount