Chapter 16 Quiz

Place the steps of the operating cycle in order from first to last:

1. order inventory 2. sell the finished product 3. collect cash from the sale

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

capital budgeting capital structure dividend policy

The difference between the operating cycle and the accounts payable period is the ____________.

cash cycle

Commercial paper is an example of a:

debt security

Which of the following are activities that increase cash?

decreasing fixed assets increasing long-term debt

The basic balance sheet identity can be written as Net working capital + Fixed assets = Long-term debt + _______________

equity

Short-term cash flows are uncertain because _________________.

future sales and costs cannot be precisely predicted

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

high

The marketing manager may want easier credit terms to increase sales, but the credit manager may worry about ____________________.

higher receivables and bad debt risk

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 difference between the _____________ cycle and the accounts payable period is the _____________ cycle.

operating cash

Carrying costs invovle:

opportunity costs

Which of the following are examples of cash disbursements?

payments of accounts payable capital expenditures wages and taxes

A restrictive short-term financing strategy implies ______________.

possible cash shortages a small investment in new working capital

Unsecured bank loans are:

short term

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

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

The cash budget allows the firm to indentify:

short-term financial opportunities short-term financial needs

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

unsecured

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

False

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

False

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

borrowing maintaining a liquidity reserve

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

commercial paper trade credit

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

commitment fee

Uses of cash can involve increasing a(n) ________________ account.

non cash current asset fixed asset

Which of the following activities by a firm will increase cash?

obtaining a loan selling bonds selling stock

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

operating

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

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

inventories accounts receviable

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

operating

True or False: Current liabilities are obligations that are expected to require cash payment within one year.

True

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

True

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

True

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

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

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

accounts receivable inventory

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

accounts receivable period

Non-committed lines of credit __________________.

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

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

assets

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

inventory accounts receivable

Ideally, short-term assets are financed with __________.

short-term liabilities

What does an inventory period of 111 days mean?

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

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

30

Inventory period equals ____________ days divided by the inventory turnover.

365

Receivables period equals _____________ days divided by the receivables turnover.

365

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

365

Which of the following increase the cash cycle?

A longer receivables period A longer inventory period

Connect:

Buy Raw Materials --> What is the desired level of inventory? Sell a Product --> Should credit by extended? Make a Product --> What technology should be used? Pay Cash for Purchases --> Should money be borrowed or cash reserves used?

Match the titles with the duties of short-term financial managers:

Cash Manager --> Marketable Securities Credit Manager --> Accounts Receivable Purchasing Manager --> Inventory Payables Manager --> Accounts Payable

What does a receivable turnover ratio of 57 mean?

Customers took, on average, 57 days to pay.

True or False: Cash collections equals beginning cash times sales

False

What does maturity hedging involve?

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

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

Maturities of 1 year or more

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

cash cycle

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:

cash management inventory management

Under a conventional factoring, the

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

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

flexible

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

flexible

Sources of cash can involve increasing a(n) _______ account.

liability equity

Dividend payments belong to the category of ___________.

long-term financing expenses

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 flow

The balance sheet identity says:

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

Short-term cash flows are unsynchronized because the payment for raw material 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

Which of the following represents a use of cash?

repurchasing stock paying off a loan accounts receivable increases

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

Inventory

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

Is risky Requires frequent refinancing

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

Being low on cash can force a firm to ________________________.

borrow money default on debt sell marketable securities

The primary tool in short-term financing planning is the ___________.

cash budget

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

credit sales

Short-term finance is primarily concerned with _______________.

current assets current liabilities

The two types of accounts receivable financing are ___________ and _______.

factoring assingment

Which activities are primary to short-term finance?

operating activities financing activities

Which of the following are typical inventory loans?

trust receipt field warehouse financing blanket inventory lien

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

True

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

False

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

False

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

False

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

False

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 firm activities decrease cash?

repurchasing stock paying off debt

Carrying costs _____________ with the level of investment in current assets.

rise

Either stock-out or cashed-out costs occur when a firm________________.

runs out of available cash runs out inventory to sell

Which of the following are shortage costs?

safety reserve costs order costs