FIN 3113 Chapter 18 Notes

What is the inventory period if the inventory turnover is 10 times?

36.5 Days

Examples of current liabilities:

Accounts Payable & Expense accruals

Examples of current liabilities:

Accounts Payable, accrued taxes and accrued wages

Duty of a credit manager:

Accounts receivable

Typical data needed to calculate operating and cash cycles:

COGS, average time it takes to sell inventory & average acct rec collection period.

Difference between the operating cycle and the accounts payable period is the ___________.

Cash cycle

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

Credit manager, controller, and marketing manager

Some examples of restrictive short term financial policies are:

Few credit sales, low cash balances, and low investment in inventory

On disadvantage to a __________ financing policy is that ___________ rates are usually higher than ___________ rates.

Flexible, long term, short term

Duty of a purchasing manager:

Inventory

Sell a product:

Should credit be extended?

Buying raw materials:

What is the desired level of inventory?

Which of the following increase the cash cycle?

a longer inventory period and a longer receivables period.

The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at _________.

a minimum

Duty of a payables manager:

accounts payable

The operating cycle equals the sum of the inventory period and the ________ period.

accounts receivable

The time taken to collect on credit sales is called the _________ period.

accounts receivable

Shorter the cash cycle, the lower the firm's investment in ____________.

acct rec and inventories

Time it takes to collect on the sale of a product is called the __________.

acct rec period

Non-committed lines of credit _________.

are informal arrangements & generally specify a maximum amount that can be borrowed

2 types of accounts receivable financing are _______ and __________.

assignment and factoring

The opportunity costs of holding liquid assets are called _________ costs.

carrying

The time between paying cash for inventory and receiving cash from selling a product is called the _____________.

cash cycle

Inventory loans use inventory as ________.

collateral

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

dividend policy, capital structure and capital budgeting

Examples of short term financial decisions:

employee payroll & raising money using commercial paper

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, NWC is always ________.

equal to zero

Shortage costs are those that ______ when the level of investment in current assets is high.

fall

Typical inventory loans:

field warehouse financing, blanket inventory lien and trust receipt

A short term financial policy involving a higher proportion of long term debt than short term debt is classified as an _____________ policy.

flexible

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

higher receivables and bad debt risk

Activities that decrease cash:

increasing fixed assets & decreasing equity

Which are characteristics of non-SEC registered commercial paper?

interest often below prime rate, issued by large highly rated firms, & issued directly by the firm.

The operating cycle is the sum of the ______________ period and the accounts receivable period.

inventory

loans financed with inventory as collateral are called ___________________.

inventory loans

Operating cycle is composed of which periods?

inventory period & accounts receivable period

Example of a restrictive short term financial policy:

keeping low cash balances

Some examples of short term flexible financing policies include:

large cash balances & large investments in inventory

Examples of short term flexible financing policies include:

large investments in inventory and large cash balances.

Sources of cash can involve increasing an ____________ account.

liability and equity

Current assets are listed on the balance sheet in ________ order.

liquidity

Net working capital equals current assets _______ current liabilities

minus

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

more

Current liabilities are firm obligations that will require payment within the _______ period if it is longer than a year.

operating

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

operating

Which are shortage costs?

order costs & safety reserve costs

Steps of the operating cycle in order from first to last:

order inventory, sell the finished product, and collect cash from the sale.

Which represents short term finance concerns?

ordering raw materials and paying for supplies

A restrictive short term financing strategy implies ________________.

possible cash shortages and a small investment in NWC

A product begins its accounting life as inventory and is converted to an _______ when it is sold on credit.

receivable

The main problems with maturity mismatching are that it ___________.

requires frequent refinancing & is risky

Total asset turnover is defined as:

sales divided by total assets

2 major elements of a firm's short term financial policy are:

the size of the firm's investment in current assets & the financing of current assets.

Used as collateral for short term secured loans:

Inventory & acct rec

Being low on cash can force a firm to _____________.

sell marketable securities, default on debt and borrow money

Which activities will increase cash?

selling bonds, obtaining a loan and selling stock.

Financing of current assets is measured by the proportion of:

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

Short-term assets are listed on the balance sheet in decreasing order of _______.

the time needed to convert them to cash

Time from the acquisition of inventory to when the inventory is paid for is called the _______________ period.

Accounts payable

Make a product:

what technology should be used?

Other important sources of short term financing besides secured and unsecured borrowing for a company are:

Commercial paper & trade credit

Generally used as security for short term secured loans.

Inventory & accounts receivable

Duty of a cash manager:

Marketable securities

Pay cash for purchases:

Should money be borrowed or cash reserves used?

For US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% total assets today primarily because of more efficient:

cash mgmt & inventory mgmt.

Carrying costs will increase with the level of investment in _________________.

current assets

Short term finance is primarily concerned with __________.

current assets & current liabilities

Commercial paper is an example of a:

debt security and short term security

Which are activities that increase cash?

decreasing fixed assets & increasing long term debt

The basic balance sheet identity can be written as Net working capital + fixed assets = long term debt + ________.

equity

Compensating balances effectively ________ the interest rate being paid on a loan.

increase

Some examples of restrictive short term financial policies include:

low investment in inventory, low cash balances, and few credit sales.

Example of a flexible short-term financial policy:

making large investments in inventory

An _____________ bank loan requires no security or collateral

unsecured

Another name for short term financial management is _______ management.

working capital

Carrying costs ________ with the level of investment in current assets.

Rise