Intermediate Financial Management Quiz 2

What is one way to increase cash

Accepting credit from the supplier

The operating cycle equals the sum of the

Inventory period and the accounts receivable period

Some examples of short term flexible financing policies include

Large cash balances and large investments in inventory

Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called a(n)

Line of credit

Current assets are listed on the balance sheet in what order?

Liquidity order

For US corporations, current assets have fallen from 50% of total assets to 40% of total assets because of

More efficient cash and inventory management

The balance sheet identity says that

Net working capital plus fixed assets equals long term debt plus equity

The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the

Operating cycle

Examples of shortage costs

Order costs and safety reserve costs

What will decrease NWC?

Paying off long term debt

What is one use of cash?

Purchase of inventory

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as

Receivables financing

Another term for short term financial management is

Working capital management

Examples of activities that increase cash?

decreasing fixed assets and increasing long term debt

Sources of cash can involve

increasing liabilities accounts and increasing equity

Generally used for security for short term loans

inventory and accounts receivables

Trade credit

one source of short term funds, involves taking more time to pay payables

The financing of current assets is measured by the proportion of

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

Examples of cash dispersants

wages and taxes, capital expenditures, and payments of accounts payable

The length of time between the sale of inventory and the collection of the payment for that sale is called the

Accounts receivable period

The operating cycle is composed of which periods?

Accounts receivable period, and inventory period

An increase in which of the following is an indicator that the accounts receivable policy is becoming more restrictive?

Accounts receivable turnover rate

Examples of a current liability

Accrued wages, accrued taxes, expense accruals, and accounts payable

Long-term financing is concerned with

Capital structure, capital budgeting, and dividend policy

What are sources of cash?

Decrease in inventory and sale of preferred stock

What action will increase the operating cycle?

Decreasing the receivable turnover rate

Unsecured bank loans are

Short term

If the investments in accounts receivables is lower then

Total assets are lower

Non-committed lines of credit are

informal arrangements and generally specify the max amount that can be borrowed

Steps of the operating cycle

order inventory, sell finished product, and then get cash

Typical inventory loans

Blanket inventory loans, field warehouse financing, trust financing

The opportunity costs of holding liquid assets are called

Carrying costs

The time between paying cash for inventory and receiving cash for selling inventory is called the

Cash Cycle

Current assets are

Cash and other assets that can be turned into cash within a year

Money deposited by a borrower with the bank in a low or non-interest bearing account as a condition of a loan agreement is called

Compensating balance

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

Compensating balances

Short-term finance is concerned with

Current assets and current liabilities

What will increase the operating cycle?

Decreasing the receivables turnover rate

Which one of the following actions will tend to increase the accounts receivable period from its current 34 days?

Eliminating the discount for early payment by credit customers

Current liabilities are

Firm obligations that will require re-payment within the operating period if it is longer than a year

Inventory loans

Loans financed with inventory used as collateral

Short term financial managers involved with selling on credit

Marketing manager, credit manager, and the controller

What is one example of a source of cash?

Sale of inventory

Total asset turnover is defined as

Sales divided by total assets

Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0.

Selling inventory at a profit on credit

Two major elements of a short term financing policy are

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

The optimal investment in current assets for an operating firm is at the point where

The total cost of holding current assets is minimized

A restrictive short term financing policy includes

a small investment in net working capital and possible shortage of cash

The gap between short term cash inflows and cash outflows is filled with

borrowing and maintaining a liquidity reserve

One disadvantage of a flexible financing policy is that

long term rates are usually higher than short term

Commercial paper is an example of

short term debt security