IFM Quiz 2 Review

Wake-Up Coffee has projected next year's quarterly sales at $820, $850, $780, and $910 for quarters 1 to 4, respectively. Accounts receivable at the beginning of the year are $200. Wake-Up has a collection period of 15 days. What is the amount of the accounts receivable balance at the end of quarter 2? Assume a year has 360 days.

$141.67

Metal Products Co. has an inventory period of 53 days, an accounts payable period of 68 days, and an accounts receivable turnover rate of 18. What is the length of the cash cycle?

5.28 days

Which one of the following statements is correct concerning the cash balance of a firm?

A cumulative cash deficit indicates a borrowing need.

Which one of the following statements is correct in relation to a firm's short-run financial risk?

A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk.

Which one of the following will increase the accounts payable period, all else held constant?

An increase in the ending accounts payable balance

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

B)Accounts receivable period.

Costs that increase as a firm acquires additional current assets are called ________ costs.

Carrying

Which one of the following actions will tend to increase the inventory period?

Increasing inventory selection to attract more customers

Which one of the following will decrease the operating cycle?

Increasing the accounts receivable turnover rate

Which one of the following statements is correct concerning the cash cycle?

The longer the cash cycle, the more likely a firm will need external financing.

Which of these affects the length of the cash cycle but not the operating cycle?

accounts payable period

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 a

compensating balance

Which one of these is a source of cash?

decreasing inventory

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a

derivative security

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

swap contract

Details Corp. has a book net worth of $9,800. Long-term debt is $5,600. Net working capital, other than cash, is $1,600 and fixed assets are $11,700. How much cash does the company have?

$2,100

Nadine's Boutique has a 30-day accounts payable period. The firm expects quarterly sales of $3,300, $3,400, $4,600, and $4,100, respectively, for next year. The quarterly cost of goods sold is equal to 70 percent of the next quarter's sales. The firm has a beginning accounts payable balance of $975 as of quarter 1. What is the amount of the projected cash disbursements for accounts payable for quarter 3 of next year? Assume a year has 360 days.

$2,986.67

On May 1, your firm had a beginning cash balance of $175. Your sales for April were $430 and your May sales were $480. During May, you had cash expenses of $110 and payments on your accounts payable of $290. Your accounts receivable period is 30 days. What is your firm's beginning cash balance on June 1?

$205

Breakwater Aquatics has a 40-day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400, respectively. What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days.

$3,156

As of the beginning of the quarter, Callahan's, Inc. had a cash balance of $460. During the quarter, the company collected $480 from customers and paid suppliers $360. The company also paid an interest payment of $20 and a tax payment of $110. In addition, the company repaid $140 on its long-term debt. What is Callahan's cash balance at the end of the quarter?

$310

At the beginning of the year, BJ's had an outstanding short-term loan of $418. The interest charges for the year are $27. The projected net cash flow for this year is $123, prior to any payment of principal or interest on this loan. What is the anticipated loan balance at year-end?

$322

DM Electronics has projected sales of $900, $980, $1,040, and $1,200 for quarters 1 to 4, respectively. Sales in the following year are projected to be 12 percent greater in each quarter. Assume the firm places orders during each quarter equal to 40 percent of projected sales for the next quarter. How much will the firm pay to its suppliers in quarter 2 if its accounts payable period is 60 days?

$400.00

A firm has projected credit sales of $547,200 for April and $570,240 for May. Credit purchases are $211,680 for April and $252,720 for May. Interest is $16,410 a month. Wages and other expenses are projected at $57,240 for April and $69,420 for May. The firm plans to purchase $119,520 of equipment in April with additional purchases of $131,040 in May. The company predicts that 3 percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. In March, credit sales were $302,400, and credit purchases were $224,640. The April 1 cash balance was $386,200. What is the cash balance at the end of May?

$460,374

The Mish Mash Store has a beginning cash balance of $515 on March 1. The firm has projected sales of $580 in February, $680 in March, and $750 in April. The cost of goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 10 days. The firm has monthly cash expenses of $148. What is the projected ending cash balance at the end of March? Assume every month has 30 days.

$538

The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter. No capital expenditures are planned. The projected sales for year 1 are $690, $660, $590, and $560 for quarters 1 to 4, respectively. Sales for the first quarter of year 2 are projected at $720. What is the amount of the total disbursements for quarter 2 of year 1?

$579.43

Plant Mart has a beginning receivables balance on February 1 of $965. Sales for February through May are $510, $580, $820, and $1,450, respectively. The accounts receivable period is 30 days. What is the amount of the April collections? Assume a year has 360 days.

$580

The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales for January through April are $440, $480, $690, and $720, respectively. The accounts receivable period is 45 days. How much did the firm collect in the month of April? Assume a year has 360 days.

$585

S&S Sporting Goods has expected sales of $980, $720, $640, and $950 for the months of January through April, respectively. The accounts receivable period is 26 days. What is the accounts receivable balance at the end of February? Assume each month has 30 days.

$624

The Purple House has projected sales of $48,000, $61,000, $89,000, and $145,000 for quarters 1 through 4 of next year, respectively. Inventory is purchased at 55 percent of the sales price and is purchased one quarter prior to the quarter of sale. The accounts payable period is 45 days. The accounts payable balance at the beginning of the year is $62,000. What is the amount of the expected disbursements for the third quarter?

$64,350

Kid's Delight expects to sell $15,900 of toys in December, $4,700 in January, $6,400 in February, and $8,100 in March. The wholesale cost is 71 percent of the retail price. The firm has a receivables period of 30 days, a payables period of 60 days, and buys inventory one month prior to selling it. What is the accounts payable balance at the end of January? Assume a year has 360 days.

$7,881

Duck-n-Run has projected sales of $120,000 for January, $118,000 for February, and $146,000 for March. The firm collects 55 percent in the month of sale, 43 percent in the month after sale, and 2 percent two months after sale. The accounts receivable balance at the end of the previous quarter was $27,000 of which $22,000 was uncollected December sales. What is the amount of the January collections?

$92,022

The Dog House expects sales of $480, $760, $920, and $960 for the months of May through August, respectively. The firm collects 80 percent of sales in the month of sale, 15 percent in the month following the month of sale, and 3 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August?

$928.80

Foods Galore has a line of credit of $250,000 with an interest rate of 1.75 percent per quarter. The credit line also requires that 1.5 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Food Galore's short-term investments are earning .45 percent per quarter. What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest

1.81 percent

Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter. The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Your short-term investments are paying .15 percent per month. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest.

1.81 percent

Mid-Western Markets has sales of $947,000 and costs of goods sold of $769,000. At the beginning of the year, the inventory was $74,300. At the end of the year, the inventory balance was $69,800. What is the inventory turnover rate?

10.67 times

North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 68 percent of sales. The firm has an average inventory of $23,000. How many days on average does it take the firm to sell its inventory?

13.02 days

The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of sales. The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000. How long on average does it take the firm to collect its receivables?

17.78 days

The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.8 percent. The average collection period is 39 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement?

18.53 percent

West Chester Automation has an inventory turnover of 17.5 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle?

23.68 days

New Products has sales of $913,000 and cost of goods sold of $684,000. The firm had a beginning inventory of $43,000 and an ending inventory of $48,000. What is the length of the inventory period?

24.28 days

Peterson's Antiquities currently has a 26-day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 4 days, and increases its payables period by 3 days. What will the length of the cash cycle be after these changes?

25 days

AC Corporation has beginning inventory of $9,049, accounts payable of $7,212, and accounts receivable of $6,333. The end of year values are $7,850 for inventory, $8,515 for accounts payable, and $7,029 for accounts receivable. Net sales are $91,200 and costs of goods sold are $63,008. How many days are in the cash cycle?

30.1 days

On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87 days on average to pay for its purchases. On the other hand, its average customer pays with a credit card which allows the firm to collect its receivables in 4 days. Given this information, what is the length of operating cycle?

31 days

Your firm has an average collection period of 47 days. Current practice is to factor all receivables immediately at a discount rate of 3.5 percent. Assume that default is extremely unlikely. What is the effective cost of borrowing?

31.87 percent

The Mountain Top Shoppe has sales of $387,000, average accounts receivable of $28,600 and average accounts payable of $32,800. The cost of goods sold is equivalent to 79 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?

39.16 days

A company currently has a 51-day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 3 days, and increases its payables period by 4 days. What will the length of the cash cycle be after these changes?

48 days

Morning Star has credit sales of $914,900, costs of goods sold of $764,800, average accounts receivable of $121,300, and average accounts payable of $127,600. On average, how long does it take for the firm's credit customers to pay for their purchases?

48.39 days

A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year?

5.3 percent

You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .45 percent per month. In addition, 3 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement?

5.71 percent

Fancy Footwear has a line of credit with a local bank in the amount of $100,000. The loan agreement calls for annual interest of 6.5 percent with a compensating balance of 4 percent of the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs $82,000 to cover expenses for one year?

6.77 percent

The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect:

60 percent of March sales

Meryl Enterprises currently has an operating cycle of 64 days. The firm is analyzing some operational changes, which are expected to increase the accounts receivable period by 3 days and decrease the inventory period by 6 days. The accounts payable turnover rate is expected to increase from 9 to 11 times per year. If all of these changes are adopted, what will the firm's new operating cycle be?

61 days

Juno Industrial Supply has a line of credit of $150,000 with an interest rate of 7.5 percent. The loan agreement requires a compensating balance of 2.5 percent of the total amount borrowed, which will be held in an interest-free account. What is the effective interest rate if the firm borrows $115,000 for one year?

7.69 percent

Bradley's has an inventory turnover rate of 8, a payables turnover rate of 7, and a receivables turnover rate of 11. How long is the firm's operating cycle?

78.81 days

HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $458,000. What is the payables turnover rate?

8.15 times

Interior Designs has an inventory period of 64 days, an accounts payable period of 38 days, and an accounts receivable period of 29 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. What will be the new operating cycle given the change in the payables period?

93

Which one of these statements is correct? Assume all else held constant

A negative cash cycle is preferable to a positive cash cycle

Josie's Craft Shack has a beginning cash balance for the quarter of $1,057. The store has a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow funds as needed to maintain that balance. Currently, the firm has a loan balance of $360. How much will the store borrow or repay if the net cash flow for the quarter is -$320?

Borrow $263

Central Supply purchased a toboggan for inventory this morning and paid cash for it. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the:

C) Cash cycle

The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the:

C)Inventory period.

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a:

Cash Budget

Metal Designs, Inc., historically produced products for inventory. Now, the firm only produces a product when it receives an actual order from a customer. All else equal, this change will:

Decrease the cash cycle

Which one of these will increase the cash cycle, all else held constant?

Decreasing the accounts receivable turnover rate

Which one of these actions will increase the operating cycle? Assume all else held constant.

Decreasing the receivables turnover rate

The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the:

E. Accounts Payable period

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

Assume each month has 30 days and a firm has a 60-day accounts receivable period. During the second calendar quarter of the year, that firm will collect payment for the sales it made during which of the following months?

February, March, and April

Long-run financial risk:

Generally results from changes in the underlying economics of a business.

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Hedging

A flexible short-term financial policy:

Incurs more carrying costs than a restrictive policy

The operating cycle is equal to the

Inventory period plus the accounts receivable period

An increase in which one of the following will decrease the cash cycle, all else held constant?

Inventory turnover rate

A forward contract:

Is a binding agreement on both the buyer and the seller and nets out as a zero sum game.

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

If a firm adheres to a restrictive short-term financial policy, then the firm will generally have:

Little, if any, investment in marketable securities

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) ________ contract.

Option

Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0

Paying a payment on a long-term debt

Which one of these is a use of cash?

Paying employee wages.

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?

Purchased a put option

Which one of the following can a firm do if it effectively manages its financial risks?

Reduce the price volatility the firm faces

The Cement Works has a beginning cash balance for the quarter of $1,000. Susie, the firm's president, requires a minimum cash balance of $1,000 be maintained and requires borrowing be used to maintain that balance. If funds have been borrowed, then she requires that those loans be repaid as soon as excess funds are available. Currently, the firm has a loan outstanding of $1,260. How much will the firm borrow or repay this quarter if the quarterly receipts are $3,957 and the quarterly disbursements are $3,761?

Repay $196

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

Costs that decrease as a firm acquires additional current assets are called ________ costs.

Shortage

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

Sold a call option

Which one of these statements related to forward contracts is correct?

The buyer of a forward contract on corn benefits if the price of corn increases during the contract period

Tall Guys Clothing has a 45-day collection period. Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days.

The firm will collect a total of $2,400 in Quarter 4

The optimal investment in current assets for an operating firm occurs at this point where:

The total costs of holding current assets is minimized

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?

Transactions exposure

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Wheat farmers and bakery

Assume all else held constant. If you pay your suppliers five days sooner, then:

You may require additional funds from other sources to fund the cash cycle

Which one of the following increases cash?

accepting credit from a supplier

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

accounts receivable financing

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

accounts receivable turnover rate

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?

forward contract

By definition, which one of the following contracts is marked to the market on a daily basis?

futures contract

By hedging financial risk, a firm can

gain time to adapt to changing market conditions

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

invest heavily in inventory

The seller of a forward contract:

is obligated to make delivery and accept the forward price.

The operating cycle describes how a product

moves through the current asset accounts

Shortage costs are least associated with:

opportunity costs related to high levels of working capital