Chapter 18 and Smartbook - Principles of Finance

(Select all that apply) Which of the following are typical inventory loans?

Trust receipt Blanket inventory lien Field warehouse financing

Which one of the following is an example of a flexible short-term financial policy?

Making large investments in inventory

(Select all that apply) Which of the following activities by a firm will increase cash?

Selling bonds Obtaining a loan Selling stock

(Select all that apply) Which of these are generally used as collateral for short-term secured loans?

Accounts receivable Inventory

(Select all that apply) Which of the following are examples of current liabilities?

Accrued wages Accrued taxes Accounts payable

Net working capital equals current assets ______ current liabilities.

Minus

Which of the following firm activities decrease cash?

Paying off debt Repurchasing stock

(Select all that apply) Which of the following are examples of short-term financial decisions?

Raising money using commercial paper Employee payroll

Another name for short-term financial management is ___ management.

working capital

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

accounts receivable

(Select all that apply) Which of the following are typical data needed to calculate operating and cash cycles?

Cost of goods sold Average accounts receivable collection period Average time it takes to sell inventory

If starting accounts receivable are $100, sales are $200, and cash collections are $50, then the formula for ending accounts receivable is ___.

$100 + 200 - 50

If the cost of goods sold is $30 million and the average payables is $2 million, then the payables period formula is ______.

365/($30 million/$2 million)

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

365/10

(Select all that apply) Which of the following increase the cash cycle?

A longer inventory period A longer receivables period

Which of the following will not increase a company's cash cycle?

A longer payables period

Which one of the following represents a source of cash?

An increase in accounts payable

Which of the following is not needed to calculate operating and cash cycles?

Average inflation rates

(Select all that apply) Which of the following activities decrease cash?

Decreasing equity Increasing fixed assets

(Select all that apply) Which of the following are examples of current assets?

Marketable securities Cash

Loans financed with inventory as collateral are called ____ loans.

inventory

(Select all that apply) Other important sources of short-term financing besides secured and unsecured borrowing for a company are _____.

trade credit commercial paper

If the investment in accounts receivable is lower, then ___.

total assets are lower

If the receivables turnover ratio is 14.6 times, what is the formula for the receivables period?

365/14.6

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 equals ______ days.

60

The payables turnover is equal to the _____ divided by the average payable.

COGS

Long-term debt + Equity + Current liabilities - Current assets other than cash - Fixed assets = ____

Cash

Match the titles with the duties of short-term financial managers.

Cash Manager = Marketable Securities Credit Manager = Accounts Receivable Purchasing Manager = Inventory Payables Manager = Accounts Payable

(Select all that apply) Which of the following are activities that increase cash?

Decreasing fixed assets Increasing long-term debt

Cash = Long-term debt + _____ + Current liabilities - Current assets other than cash - Fixed assets

Equity

The basic balance sheet identity can be written as Net working capital + Fixed assets = Long-term debt + ______.

Equity

(Select all that apply) Which of the following are examples of current liabilities?

Expense accruals Accounts payable

True or false: Companies in the United States have moved to less restrictive short-term policies throughout history.

False

(Select all that apply) Which activities are primary to short-term finance?

Financing activities Operating activities

What does maturity hedging involve?

Financing fixed assets with long-term financing and inventories with short-term financing

The _____ turnover is the cost of goods sold divided by the average inventory.

Inventory

(Select all that apply) The operating cycle is composed of which periods?

Inventory period Accounts receivable period

(Select all that apply) Which of the following are characteristics of non-SEC registered commercial paper?

Issued by large, highly rated firms Interest often below prime rate Issued directly by the firm

Which of the following is an example of a restrictive short-term financial policy?

Keeping low cash balances

Which of the following is not generally used as security for short-term secured loans?

Notes payable

(Select all that apply) Which of the following are shortage costs?

Order costs Safety reserve costs

(Select all that apply) Which of the following represent short-term finance concerns?

Paying for supplies Ordering raw materials

(Select all that apply) Which of the following firm activities decrease cash?

Paying off debt Repurchasing stock

(Select all that apply) Which of the following are examples of cash disbursements?

Wages and taxes Payments of accounts payable Capital expenditures

A flexible short-term financing strategy implies surplus cash and little short-term borrowing. The advantage of such a strategy is ___.

a lower probability of financial distress

Current assets are cash and other assets that will be turned into cash within ___.

a year

Current liabilities are firm obligations that will require cash payment within ___.

a year

The ___ period is the time between the receipt of inventory and actually paying for that inventory.

accounts payable

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

accounts receivable

(Select all that apply) Noncommitted lines of credit ___.

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

The optimal balance of current _____ occurs where the sum of the carrying costs and the shortage costs is at a minimum.

assets

(Select all that apply) The two types of accounts receivable financing are ___ and ____.

assignment factoring

A forecast of cash receipts and disbursements for the next planning period is called a cash _____.

budget

The inventory period plus the accounts receivable period minus the accounts payable period equals the _____ cycle.

cash

The difference between the operating cycle and the accounts payable period is the ______.

cash cycle

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

cash cycle

If a firm runs out of cash and cannot readily sell marketable securities, it is in a(n) ____ situation.

cash-out

A _____ line of credit is a more formal legal arrangement than a _____ line of credit. (Enter one word per blank.)

committed; noncommitted

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

compensating balances

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

current assets

(Select all that apply) Being low on cash can force a firm to ___.

default on debt borrow money sell marketable securities

(Select all that apply) Short-term finance is concerned with current assets and current liabilities, whereas long-term finance is concerned with ___.

dividend policy capital budgeting capital structure

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, net working capital is always ___.

equal to zero

(Select all that apply) Sources of cash can involve increasing a(n) ______ account.

equity liability

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

fall

Some examples of restrictive short-term financial policies include ___.

few credit sales low investment in inventory low cash balances

A short-term financial policy involving a higher proportion of long-term debt than short-term debt is classified as a(n) ______ policy.

flexible

Short-term cash flows are uncertain because ___.

future sales and costs cannot be precisely predicted

A restrictive short-term financial policy implies a ______ proportion of short-term debt relative to long-term debt.

high

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

increase

(Select all that apply) The shorter the cash cycle, the lower the firm's investment in ______.

inventories accounts receivable

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

inventory

(Select all that apply) For U.S. corporations, current assets have fallen from 50 percent of total assets in the 1960s to 40 percent of total assets today primarily because of more efficient _____.

inventory management cash management

(Select all that apply) Some examples of short-term flexible financing policies include ___.

large investments in inventory large cash balances

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

liquidity

Dividend payments belong to the category of ___.

long-term financing expenses

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

minimum

A(n) ______ cash cycle can occur when a firm gets paid before it ships the product.

negative

The balance sheet identity says _____.

net working capital plus fixed assets equals long-term debt plus equity

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

Carrying costs involve _____ costs.

opportunity

Short-term cash flows are unsynchronized because the payment for raw materials usually does not match the cash flow from ___.

product sales

Other things constant, the shorter the inventory period, the ______ cash is collected.

quicker

A product begins its accounting life as inventory and is converted to a(n) ______ when it is sold on credit.

receivable

Accounts receivable financing is a secured _____-term loan that involves either the assignment or the factoring of receivables.

short

Unsecured bank loans are _____.

short term

Ideally, short-term assets are financed with ___.

short term liabilities

The need for short-term financial management arises from the gap between the ____.

short-term cash inflows and short-term cash outflows

The financing of current assets is measured by the proportion of _____.

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

(Select all that apply) The cash budget allows the firm to identify ___.

short-term financial opportunities short-term financial needs

(Select all that apply) The two major elements of a firm's short-term financial policy are the ___.

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

Those firm activities that increase cash are called ___.

sources of cash

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

the time needed to convert them to cash

The receivables _____ is the credit sales divided by the average accounts receivable.

turnover

A(n) ______ bank loan requires no security or collateral.

usecured

(Select all that apply) Which short-term financial managers are involved with selling on credit?

The marketing manager The controller The credit manager

Under which type of inventory loan does the lender have a lien against all of the borrower's inventory?

A blanket inventory lien

(Select all that apply) Some examples of restrictive short-term financial policies include ___.

low cash balances few credit sales low investment in inventory

(Select all that apply) A restrictive short-term financing strategy implies ___.

a small investment in net working capital possible cash shortages