Chapter 16 - Corporate Finance

Cash manager - marketable securities credit manager - accounts receivable purchasing manager - inventory payables manager - accounts payable

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buy raw materials - what is the desired level of inventory? sell a product - should credit be extended? make a product - what technology should be used? what technology should be used? pay cash for purchases matches Choice, should money be borrowed or cash reserves used? should money be borrowed or cash reserves used?

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True or false: Current assets are cash and other assets that are expected to convert to cash within 1-5 years.

False Reason: Current assets are cash and other assets that are expected to convert to cash within the year.

True or false: Other important sources of short-term financing for a company include short-term stocks.

False Reason: Other important sources of short-term financing besides secured and unsecured borrowing for a company are commercial paper and trade credit.

True or false: The collection cycle is the difference between disbursement and collection of cash.

False Reason: The cash cycle is the difference between disbursement and collection of cash.

The ______ cycle is the time from when inventory is acquired until cash is collected from the sale of the product.

operating

Unsecured bank loans are:

short term

Ideally, short term assets are financed with _____

short term liabilities

The financing of current assets is measured by the proportion of:

short-term debt and long-term debt used to finance current assets

Inventory period equals _____ days divided by the inventory turnover.

365

True or false: Buying raw materials requires a decision about how cash should be collected.

False Reason: Buying raw materials requires a decision about how much inventory to order.

What does maturity hedging involve?

Financing fixed assets with long-term financing and inventories with short-term financing

A(n) ______ bank loan requires no security or collateral.

unsecured

Those firm activities that decrease cash are called:

uses of cash

True or false: The net payments receivable equals the cash collections minus the cash disbursements.

False Reason: The net cash inflow is the difference between cash collections and cash disbursements.

True or false: The operating cycle equals current assets minus current liabilities.

False Reason: The operating cycle equals inventory period plus accounts receivable period.

Between the 1960's and the present time, current liabilities have risen from about 20% of total liabilities to almost _______ percent.

30

The balance sheet identity says:

net working capital plus fixed assets equals long-term debt plus equity

Ending accounts receivable equals starting accounts receivable plus ______ minus collections.

credit sales

Which of the following is not a characteristic of commercial paper?

Maturities of 1 year or more

True or false: The cash cycle is equal to the operating cycle minus the accounts payable period.

True

The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___.

a minimum

A flexible short-term financing strategy implies surplus cash and little borrowing, but the advantage of such a strategy is:

a reduced probability of financial distress

Although flexible short-term financial polices are more costly, they result in _____.

a reduced probability of financial distress

A flexible short-term financing strategy implies:

a relatively large pool of marketable securities cash surpluses

The shorter the cash cycle, the lower the firm's investment in ______.

accounts receivable inventories

The time it takes to collect on the sale of a product is called the ___.

accounts receivable period

The optimal balance of current _____ occurs where the sum of the carrying costs and the shortage costs is at a minimum.

assets

The opportunity costs of holding current assets are called ______ costs.

carrying

The time it takes to acquire and sell inventory is called the ______ period.

inventory

Other important sources of short-term financing besides secured and unsecured borrowing for a company are:

trade credit commercial paper

True or false: Cash collections equals beginning cash times sales.

False Reason: Cash collections equals beginning accounts receivable plus 1/2 times Sales.

Which of the following activities decrease cash?

Increasing fixed assets Decreasing equity

What does an inventory period of 111 days mean?

On average, inventory sat for about 111 days before it was sold.

Which activities are primary to short-term finance?

Operating activities Financing activities

Which of the following are examples of cash disbursements?

Payments of accounts payable Wages and taxes Capital expenditures

The primary tool in short-term financial planning is the _______.

cash budget

The two major elements of a firm's short-term financial policy are ___.

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

What does a receivables turnover ratio of 57 mean?

Customers took, on average, 57 days to pay.

A lack of safety reserves can lead to which of the following?

Lost customer goodwill Lost sales

Which of the following firm activities decrease cash? Paying off debt Selling property Selling inventory Repurchasing stock

Uses of cash: Paying off long term debt repurchasing some stock paying off a 90 day loan buying some inventory for cash buying some property

Commercial paper is an example of a:

debt security

Dividend payments belong to the category of ___.

long-term financing expenses

Carrying costs involve:

opportunity costs

Receivables period equals _____ days divided by the receivables turnover.

365

The payables period equals _____ days divided by the payables turnover.

365

Under which type of inventory loan does the lender have a lien against all of the borrower's inventory?

A blanket inventory lien

Which of the following increase the cash cycle?

A longer inventory period A longer receivables period

Which of the following represents a source of cash?

Accounts payable increases

Which of the following are generally used as security for short-term secured loans?

Accounts receivable Inventory

True or false: The gap between short-term outflows and inflows can be filled by holding a liquidity reserve.

True

True or false: The payables turnover equals the cost of goods sold divided by the average payables.

True

Which of the following are typical inventory loans?

Trust receipt Blanket inventory lien Field warehouse financing

Current assets are cash and other assets that will be turned into cash within ___.

a year

Current liabilities are firm obligations that will require cash payment within ___.

a year

The ___ period is the time between the receipt of inventory and actually paying for that inventory.

accounts payable

The cash cycle is equal to the operating cycle minus the ______ period.

accounts payable

The time from the acquisition of inventory to when the inventory is paid for is called the ___ period.

accounts payable

The operating cycle equals the sum of the inventory period and the ______ period.

accounts receivable

The time taken to collect on credit sales is called the ___ period.

accounts receivable

The gap between short-term cash inflows and outflows can be filled by ___.

borrowing maintaining a liquidity reserve

Short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with ___.

capital budgeting dividend policy capital structure

The time between paying cash for inventory and receiving cash from selling a product is called the ______.

cash cycle

A committed line of credit is a more formal arrangement typically involving a _______ .

commitment fee

Short-term finance is primarily concerned with ___.

current assets current liabilities

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

A short-term financial policy involving a higher proportion of long-term debt than short-term debt is classified as a(n) ______ policy.

flexible

With the _____ approach, a firm uses a pool of marketable securities as a buffer against changing current asset needs.

flexible

Short-term cash flows are uncertain because ___.

future sales and costs cannot be precisely predicted

Non-committed lines of credit ___.

generally specify a maximum amount that can be borrowed are informal arrangements

A restrictive short-term financial policy implies a ______ proportion of short-term debt relative to long-term debt.

high

With the flexible approach, the firm finances _____, while with the restrictive approach, the firm finances _____.

internally externally

Security for short-term loans usually consists of accounts receivable, _____, or both.

inventories

The main problems with maturity mismatching (financing long-term assets with short-term debt) are that it ___.

is risky requires frequent refinancing

Firms who attempt to match the maturity of assets and liabilities are said to employ __________.

maturity hedging

The difference between cash collections and cash disbursements is the predicted ______.

net cash inflow

The primary concerns in short-term finance are the firm's short-run _____ and financing activities.

operating

The difference between the _____ cycle and the accounts payable period is the _____ cycle.

operating cash

Steps of the Operating Cycle

order inventory sell the finished product collect cash from the sale

A restrictive short-term financing strategy implies ___.

possible cash shortages a small investment in net working capital

Short-term cash flows are unsynchronized because the payment for raw materials usually does not match the cash flow from ___.

product sales

A product begins its accounting life as inventory and is converted to a(n) ______ when it is sold on credit.

receivable

Under a conventional factoring, the

receivables are sold at a discount collection of the receivables is the factor's responsibility

Either stock-out or cash-out costs occur when a firm ___.

runs out of inventory to sell runs out of available cash

The cash budget allows the firm to identify:

short-term financial opportunities short-term financial needs

Which of the following are activities that increase cash?

sources of cash: inc. long-term debt - borrowing LT inc equity - selling stock inc current liabilities - getting a 90 da loan dec. current assets other than cash - selling inventory for cash dec. fixed assets - selling some property

True or false: A stock-out occurs if a store runs out of inventory and could result in lost customers.

True

Which short-term financial managers are involved with selling on credit and are directly responsible to the vice president of finance?

The controller The credit manager

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

assignment factoring

For US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% of total assets today primarily because of more efficient:

inventory management cash management