Chapter 18 LS Intermediate Corporate Finance
Operating Cycle Steps
1. Order Inventory 2. Sell the Finished Product 3. Collect Cash from the Sale
Payables Manager
Accounts Payable
Buy raw materials
What is the desired level of inventory?
A firm borrows $1,000 with a compensating balance requirement of 3 percent in addition to the 10 percent annual interest rate. As a result, the effective interest rate is ____ percent 10.06 10.31 9.67 10.42
10.31 (.1*$1,000)/[$1,000&(1-.03)]=10.31%
Which of the following are examples of current liabilities? Accounts Payable Accrued Wages Materials Inventory Accrued Taxes
Accounts Payable Accrued Wages Accrued Taxes
Credit Manager
Accounts Receivable
The two types of accounts receivable financing are _____ and _____ Assignment Accepting Securing Factoring
Assignment Factoring
The time between paying cash for inventory and receiving cash from selling a product is called the _____________ Accounts Receivable Period Accounts Payable Period Operating Cycle Cash Cycle
Cash Cycle
Short-term finance is primarily concerned with Current liabilities Current assets Retained Earnings
Current liabilities Current assets
Which of the following are activities that increase cash? Decreasing fixed assets Decreasing current liabilities Increasing fixed assets Increasing long-term debt
Decreasing fixed assets Increasing long-term debt
Shortage costs are those that _______________ when the level of investment in current assets is high Fall Undulate Rise Inflate
Fall
Compensating balances effectively _____________ the interest rate being paid on a loan Eliminate Increase Decrease
Increase
Purchasing Manager
Inventory
The operating cycle is composed of which periods? Inventory Period Cash Cycle Accounts Receivable Period Accounts Payable Period
Inventory Period Accounts Receivable Period
Loans financed with inventory as collateral are called Inventory loans Flexible loans Noncommitted loans Marketable loans
Inventory loans
Cash Manager
Marketable Securities
Some examples of restrictive short-term financial policies include __________ No (or few) credit sales Low investment in inventory Low cash balances High dividend payouts
No (or few) credit sales Low investment in inventory Low cash balances
Carrying Costs involve ____________ Cash-out Costs Depreciation Costs Stock-out Costs Opportunity Costs
Opportunity Costs
Sell a product
Should credit be extended?
Pay cash for purchases
Should money be borrowed or cash reserves used?
If the investment in accounts receivable is lower, then __________ Total inventory is lower Total assets are higher Total payable are higher Total assets are lower
Total assets are lower
Make a product
What technology should be used?
Another name for short-term financial management is _________ management Current liability Current asset Total earnings Working capital
Working capital
The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___________ a maximum a minimum
a minimum
Non-committed lines of credit ___________ are informal arrangements generally specify a maximum amount that can be borrowed are formal legal arrangements require commitment fees
are informal arrangements generally specify a maximum amount that can be borrowed
Being low on cash can force a firm to ____________ pay higher dividends default on debt borrow money sell marketable securities
default on debt borrow money sell marketable securities
The operating cycle is the sum of the ___________ period and the accounts receivable period cash notes payable inventory accounts payable
inventory
Current liabilities are firm obligations that will require payment within the ___________ cycle if it is longer than a year operating investing replacement business
operating