Chapter 18 - Short Term Finance and Planning

Payable Turnover

Cost of Goods Sold / Average Payable

Inventory Turnover

Cost of Goods Sold/Average Inventory

Effective Rate

Interest Paid/ The amount need to borrow

Operating Cycle

Inventory Period + Receivable Period

Receivable Turnover

Net Sale/ Average Receivable

Cash Cycle

Operating Cycle - Payable Period

APR

Receivable Turnover* [Factor Receivable Discounting/1-Factory Receivable Discounting]

How much do we need to borrow?

The amount need to borrow/ [1-%compensating balance requirement]

EAR

[1+Factor Receivable Discounting/1-Factory Receivable Discounting]^Receivable Turnover - 1

cash budget

a forecast of cash receipts and disbursements for the next planning period

line of credit

a formal (committed) of informal (noncommitted) prearranged, short-term bank loan

cash flow time line

a graphical representation of the operating cycle and the cash cycle

accounting receivable financing

a secured short-term loan that involves either the assignment or the factoring of receivables

inventory loan

a secured short-term loan to purchase inventory

Money deposited in a bank in a low-interest or non-interest-bearing account to fulfill a requirement in a loan agreement is called a:

compensating balance.

shortage costs

costs that fall with increases in the level of investment in current assets

carrying costs

costs that rise with increases in the level of investment in current assets

All else equal, which one of the following will decrease the operating cycle?

increase in the accounts receivable turnover rate

An increase in which one of the following is a use of cash?

inventory

compensating balance

money kept by the firm with a bank in low-interest on non-interest-bearing accounts as part of a loan agreement

A restrictive short-term financial policy:

results in relatively low inventory levels.

operating cycle

the period between the acquisition of inventory and the collection of cash from receivables

cash cycle

the time between cash disbursement and cash collection

accounts payable period

the time between receipt of inventory and payment for it

accounts receivable period

the time between sale of inventory and collection of the receivable

inventory period

the time it takes to acquire and sell inventory

Waterfront Yachts maintains a large inventory of unique yachts for sale to discriminating buyers. Which one of the following is the most appropriate form of financing this firm's inventory?

trust receipt

Tri-State Movers has projected quarterly sales of $1,800, $2,400, $2,800, and $1,200 for quarters one through four, respectively. The accounts receivable period is 30 days. How much will the firm collect in Quarter 3? Assume each quarter has 90 days.

$2,667

A firm has projected monthly sales of $800, $900, $1,100, and $1,400 for the months of January through April, respectively. The cost of goods sold is 60 percent of the selling price and the accounts payable period is 60 days. Goods are purchased one month prior to the month of sale. What is the amount of the March cash disbursements?

$540

The Corner Market has sales of $898,000 and cost of goods sold equal to 70 percent of sales. The beginning inventory is $64,000 and the ending inventory is $71,000. What is the length of the inventory period?

27.4 days

Payable Period

365/ Payable Turnover

Receivable Period

365/ Receivable Turnover

Inventory Period

365/Inventory Turnover

A firm has an accounts payable period of 54 days, an inventory period of 69 days, and an accounts receivable period of 37 days. What is the length of the cash cycle?

52 days

Russell's of Townville needs to borrow $48,000 for one year. The bank requires a 5 percent compensating balance on any amount borrowed and an annual interest rate of 9 percent. What is the effective interest rate on this loan?

9.47 percent