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