CH. 18

A company has a current ratio of 1.2. Which one of the following actions will increase the company's net working capital? A. Paying off a long-term debt B. Selling inventory at cost for cash C. Paying a supplier for a previous purchase D. Purchasing inventory on credit E. Selling inventory at a profit on credit

E

True or false: Companies in the United States have moved to less restrictive short term policies throughout history.

False

The process of factoring or assigning a firms receivables to other firms is known as

accounts receivable financing

"What is the desired level of inventory" is a question for

buying raw materials

The opportunity cost of holding liquid assets is called _______

carrying costs

Payments of accounts payable, wages and taxes, and capital expenditures are examples of

cash disbursements

One source of short-term funds is trade credit. Using this source means a firm will take ____ time to pay its payables.

more

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

operating

"Should money be borrowed or cash reserves be used" is a question for

paying cash for purchases

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

Capital structure, capital budgeting, and dividend policy

Which one of the following statements is correct? A. Credit card receivables funding is a relatively inexpensive method of borrowing on a short-term basis. B. With maturity factoring, the borrower receives the loan amount immediately. C. Commercial paper is short-term financing offered to highly rated corporations by major banks. D. Lines of credit frequently require a cleanup period. Correct E. The assignment of receivables involves selling accounts receivables at full price.

D

Which one of these is indicative of a restrictive short term financial policy? A. Granting credit to all customers B. Investing heavily in marketable securities C. Keeping inventory levels high D. Purchasing inventory on an as needed basis E. Maintaining a larger accounts receivable balance

D

Credit managers deal with

account receivable

Payables managers deal with

accounts payable

The shorter the cash cycle, the lower the firms investment in

accounts receivable and inventories

The two types of accounts receivable financing are _____ and ________

assignment, factoring

Deposits a firm must keep with the bank as part of a loan agreement are called ______.

compensating balances

Which short term financial managers are involved with selling on credit?

credit manager, marketing manager, and the controller

Short term finance is primarily concerned with

current liabilities and current assets

In a situation where short-term assets are always financed with short-term liabilities and where long-term assets are always financed with long-term liabilities, net working capital is always ___.

equal to zero

What activities are primary to short term finance

financing and operating activities

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

high receivables and bad debt risk

Compensating balances effectively _______ the interest rate being paid on a loan (increase or decrease)

increase

What are characteristics of non-SEC registered commercial paper

interest below prime rate and issued directly by large, highly rated firm,

Purchasing managers deal with

inventory

What periods are part of the operating cycle

inventory period and accounts receivable period

A firm with a flexible short-term financial policy will:

invest heavily in inventory

Dividend payments belong to the category of

long-term financing expenses

"What technology should be used" is a question for

making a product

Cash managers deal with

marketable securities

A cash shortage can occur because of delayed collections on

receivables

Carrying costs _____ with the level of investment in current assets

rise

Total asset turnover is defined as

sales divided by total assets

"Should credit be extended" is a question for

selling a product

The financing of current assets is measures by the proportion of

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

Ideally, short-term assets are financed with ___.

short term liabilities

The optimal investment in current assets for an active company occurs at the point where

shortage costs and carrying costs are equal

Short term, or current, assets are listed on the balance sheet in the increasing order of

time needed to convert them to cash

If the investment in accounts receivable is lower, then

total assets are lower

For U.S. corporations, current assets have fallen from 50 percent of total assets in the 1960s to 40 percent of total assets today primarily because of more efficient _____

cash management and inventory management