Test bank fundamentals of corporate finance 9th edition chap018

cash cycle plus accounts receivable period BI. An increase in the accounts payable period shortens the cash cycle.. The cash cycle is equal to the operating cycle minus the inventory per

Short-Term Finance and Planning

Multiple Choice Questions

1 The length of time between the purchase of inventory and the receipt of cash from the sale

of that inventory is called the:

A operating cycle

B inventory period

C accounts receivable period

D accounts payable period

C accounts receivable period

D accounts payable period

C accounts receivable period

D accounts payable period

5 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:

A operating cycle

B inventory period

C accounts receivable period

D accounts payable period

E cash cycle

6 A graphical representation of the operating and cash cycles is called a(n):

A operating chart

B cash flow time line

C production flow line

D component chart

E working time line

7 Costs that increase as a firm acquires additional current assets are called _ costs

9 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:

A pro forma income statement

11 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:

13 Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral This is an example of a(n):

14 Which one of the following increases cash?

A granting credit to a customer

B purchasing new machinery

C making a payment on a bank loan

D purchasing inventory

E accepting credit from a supplier

15 Which of the following are uses of cash?

I collecting a receivable

II increasing inventory

III obtaining a bank loan

IV paying a supplier for previous purchases

A I and III only

B II and IV only

C I and II only

D I, II, and IV only

E II, III, and IV only

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

A paying a supplier for a previous purchase

B paying off a long-term debt

C selling inventory at cost

D purchasing inventory on credit

E selling inventory at a profit on credit

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

A selling inventory at cost

B collecting payment from a customer

C paying a payment on a long-term debt

D selling a fixed asset for book value

E paying a supplier for the purchase of an inventory item

18 Which of the following are sources of cash?

I decrease in inventory

II increase in accounts receivable

III repayment of a bond

IV sale of preferred stock

A I and III only

B I and IV only

C II and III only

D I, II, and III only

E I, III, and IV only

19 Which of the following will increase the operating cycle?

I increasing the inventory turnover rate

II increasing the payables period

III decreasing the receivable turnover rate

IV decreasing the inventory level

A I only

B III only

C II and IV only

D I and IV only

E II and III only

20 Which one of the following equals the operating cycle?

A cash cycle plus accounts receivable period

B inventory period plus the accounts receivable period

C inventory period plus the accounts payable period

21 Which one of the following will decrease the operating cycle?

A decreasing the inventory turnover rate

B decreasing the accounts payable period

C increasing the accounts receivable turnover rate

D increasing the accounts payable period

E increasing the accounts receivable period

22 The operating cycle describes how a product:

A is priced

B is sold

C moves through the current asset accounts

D moves through the production process

E generates a profit

23 Which of the following determines the length of the operating cycle?

I cash cycle

II inventory period

III accounts payable period

IV accounts receivable period

A I and III only

B II and IV only

C I, II, and IV only

D II, III, and IV only

E I, II, III, and IV

24 Which of the following will increase the cash cycle, all else constant?

I increasing the inventory period

II decreasing the accounts receivable turnover rate

III increasing the accounts payable period

IV decreasing the accounts receivable period

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

A payables turnover

B days sales in inventory

C operating cycle

D inventory turnover rate

E accounts receivable period

26 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:

A increase the operating cycle

B lengthen the accounts receivable period

C shorten the accounts payable period

D decrease the cash cycle

E decrease the inventory turnover rate

27 Which of the following statements are correct?

I An increase in the accounts payable period shortens the cash cycle

II The cash cycle is equal to the operating cycle minus the inventory period

III A negative cash cycle is preferable to a positive cash cycle

IV The cash cycle plus the accounts receivable period is equal to the operating cycle

A I only

B III and IV only

C I and III only

D I and IV only

E I, II, and III only

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

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

B Increasing the accounts payable period increases the cash cycle

C A positive cash cycle is preferable to a negative cash cycle

D The cash cycle can exceed the operating cycle if the payables period is equal to zero

E Offering early payment discounts to customers will tend to increase the cash cycle

29 Which of the following actions will tend to decrease the inventory period?

I discontinuing all slow-selling merchandise

II selling obsolete inventory below cost just to get rid of it

III buying raw materials only as needed for the manufacturing process

IV producing goods on demand versus for inventory

A I and III only

B II and IV only

C II, III, and IV only

D I, II, and III only

E I, II, III, and IV

30 Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days

A tightening the standards for granting credit to customers

B refusing to grant additional credit to any customer who pays late

C increasing the finance charges applied to all customer balances outstanding over thirty days

D granting discounts for cash sales

E eliminating the discount for early payment by credit customers

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

A bad debts

B accounts receivable turnover rate

C accounts receivable period

D credit sales

E operating cycle

32 If you pay your suppliers five days sooner, then:

A your payables turnover rate will decrease

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

C the cash cycle will decrease

D your operating cycle will increase

E the accounts receivable period will decrease

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

A an increase in the cost of goods sold account value

B an increase in the ending accounts payable balance

C an increase in the cash cycle

D a decrease in the operating cycle

E an increase in the accounts payable turnover rate

34 Which one of the following managers determines which customers must pay cash and which can charge their purchases?

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

A maintain a low balance in accounts receivables

B only have minimal amounts, if any, invested in marketable securities

C invest heavily in inventory

D have low cash balances

E have tight restrictions on granting credit to customers

37 Which one of the following is indicative of a short-term restrictive financial policy?

A purchasing inventory on an as-needed basis

B granting credit to all customers

38 Which of the following are associated with a restrictive short-term financial policy?

I little, if any, investment in marketable securities

II liberal credit terms for customers

III low cash balances

IV increasing inventory levels

A I and III only

B II and IV only

C I and IV only

D III and IV only

E I, II, and III only

39 The Lumber Mart recently replaced its management team As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating Which of the following should the employees expect as a result of this policy change?

I reduction in sales due to stock outs

II greater inventory selection

III decreased sales due to the new accounts receivable credit policy

IV decreased investment in marketable securities

A I and II only

B II and IV only

C I, II, and IV only

D I, III, and IV only

E I, II, III, and IV

40 A flexible short-term financial policy:

A increases a firm's need for long-term financing

B minimizes net working capital

C avoids bad debts by only selling items for cash

D maximizes fixed assets and minimizes current assets

E is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs

41 A flexible short-term financial policy:

I increases shortage costs due to frequent cash-outs

II tends to increase sales as compared to a restrictive policy

III requires a sizeable investment in current assets

IV incurs more carrying costs than a restrictive policy

A I and IV only

B II and III only

C I, II, and III only

D II, III, and IV only

E I, III, and IV only

42 Shortage costs include which of the following?

I disruption of production schedules

II inventory ordering costs

III lost customer goodwill

IV brokerage costs

A I and II only

B II and III only

C II, III, and IV only

D I, II, and III only

E I, II, III, and IV

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

A both shortage costs and carrying costs equal zero

B shortage costs are equal to zero

C carrying costs are equal to zero

D carrying costs exceed shortage costs

E the total costs of holding current assets is minimized

44 Which one of the following statements is correct?

A A firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets

B A firm with a flexible financing policy frequently invests in marketable securities

C A firm with a flexible financing policy tends to use short-term financing on a frequent basis

D Firms tend to avoid short-term financing under both restrictive and flexible financing policies

E Firms with seasonal sales select flexible financing policies

45 Which one of the following statements is correct?

A Seasonal needs are financed externally when firms adhere to a flexible financing policy

B A flexible financing policy tends to increase the risk of encountering financial distress

C Long-term interest rates tend to be less volatile than short-term rates

D Most firms tend to finance inventory with long-term debt

E Short-term interest rates are generally higher than long-term rates

46 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?

A October, November, and December

B November, December, and January

C December, January, and February

D January, February, and March

E February, March, and April

47 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:

A 60 percent of February sales

B 15 percent of April sales

C 60 percent of March sales

D 15 percent of March sales

E 25 percent of February sales

48 A manufacturing firm has a 90 day collection period The firm produces seasonal

merchandise and thus has the least sales during the first quarter of a year and the highest level

of sales during the fourth quarter of a year The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters The firm ismost apt to face a cash-out situation in:

A the first quarter

B the second quarter

C the third quarter

D the fourth quarter

E any quarter with equal probabilities of occurrence

49 Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in

products related to water sports The firm purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date Sales are highest during July and August.Currently, Jill is preparing the cash disbursements section of the firm's cash budget Which one of the following statements is supported by this information?

A Inventory purchases will be highest during the months of July and August

B Inventory purchases will be highest during the months of May and June

C Payments to suppliers will be highest during the months of June and July

D Payments to suppliers will be highest during the months of July and August

E Payments to suppliers will be highest during the months of August and September

50 Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound?

I fixed expenses

II fixed asset purchases

III flexible financing policy

IV highly seasonal sales

A I and III only

B II and IV only

C III and IV only

D I, II, and III only

E II, III, and IV only

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

A Most firms attempt to maintain a zero cash balance at all times

B The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance

C On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance

D A cumulative cash deficit indicates a borrowing need

E The ending cash balance must equal the minimum desired cash balance

52 A cumulative cash deficit indicates a firm:

A has at least a short-term need for external funding

B is facing long-term financial distress

C will go out of business within the year

D is capable of funding all of its needs internally

E is using its cash wisely

53 The most common means of financing a temporary cash deficit is a:

A long-term secured bank loan

B short-term secured bank loan

C short-term issue of corporate bonds

D long-term unsecured bank loan

E short-term unsecured bank loan

54 The primary difference between a line of credit and a revolving credit arrangement is the:

A type of collateral used to secure the loan

B length of the credit period

C fact that the line of credit is a secured loan and the revolving credit arrangement is

55 A compensating balance:

I is required when a firm acquires any bank financing other than a line of credit

II increases the cost of short-term bank financing

III may be required even if a firm never borrows funds

IV is often used as a means of paying for banking services received

A I and III only

B II and IV only

C II and III only

D I and IV only

E II, III, and IV only

56 High Point Hotel (HPH) has $165,000 in accounts receivable To finance a major

purchase, the company assigns these receivables to Cross Town Bank Which one of the following statements correctly describes this transaction?

A HPH will immediately receive $165,000 and will have no further obligation related to these receivables

B HPH will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables

C Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays HPH a discounted value for its receivables

D Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays HPH a discounted price for the accounts collected after the normal collection period has elapsed

E HPH receives the full amount of its receivables upon assignment but must reimburse Cross Town Bank for any uncollected account

57 Which one of the following statements is correct?

A The assignment of receivables involves selling the firm's accounts receivables at full price

B Lines of credit frequently require a cleanup period

C With maturity factoring, the borrower receives the loan amount immediately

D Commercial paper is short-term financing offered to highly-rated corporations by major banks

E Credit card receivables funding is a relatively inexpensive method of borrowing on a term basis

short-58 Which of the following are benefits derived from short-term financial planning?

I having advance notice of when your firm will require external financing

II being able to determine the extent of time for which a loan is required

III having the ability to time capital expenditures in order to place the least financial burden possible on a firm

IV knowing for certain what your cash balance will be six months in advance

A I and III only

B I, II, and III only

C II, III, and IV only

D I, II, and IV only

E I, II, III, and IV

59 Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000 The firm had a beginning inventory of $41,000 and an ending inventory of $47,000 What is the length

of the inventory period?

60 A national firm has sales of $729,000 and cost of goods sold of $478,000 At the

beginning of the year, the inventory was $37,000 At the end of the year, the inventory balancewas $41,000 What is the inventory turnover rate?

61 North Side Wholesalers has sales of $948,000 The cost of goods sold is equal to 72 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?

65 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 $442,000 What is the payables turnover rate?

66 Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a

receivables turnover rate of 19 How long is your firm's operating cycle?

A 31 days

B 38 days

69 Interior Designs has an inventory period of 46 days, an accounts payable period of 38 days, and an accounts receivable period of 32 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 If the new discount is taken, the operating cycle will be _ days

71 West Chester Automation has an inventory turnover of 16 and an accounts payable

turnover of 11 The accounts receivable period is 36 days What is the length of the cash cycle?

A 22 days

B 23 days

73 A company currently has a 48 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?

A The firm will collect $800 in Quarter 2

B The accounts receivable balance at the beginning of Quarter 4 will be $1,150

C The firm will collect $2,000 in Quarter 3

D The firm will have an accounts receivable balance of $2,300 at the end of the year

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

75 Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730 Sales forFebruary through May are $720, $760, $820, and $850, respectively The accounts receivable period is 30 days What is the amount of the April collections? Assume a year has 360 days

A $420

B $426

77 The Athletic Sports Store has a beginning receivables balance on January 1 of $410 Sales for January through April are $440, $460, $690, and $720, respectively The accounts

receivable period is 60 days How much did the firm collect in the month of April? Assume a year has 360 days

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?

80 The Wire House purchases its inventory one quarter prior to the quarter of sale The purchase price is 55 percent of the sales price The accounts payable period is 45 days The accounts payable balance at the beginning of quarter one is $62,000 What is the amount of the expected disbursements for quarter two given the following expected quarterly sales?

disbursements for accounts payable for Quarter 3 of the next year? Assume a year has 360 days

82 Kid's Delight expects to sell $8,200 worth of toys in December, $3,700 worth in January,

$4,400 in February, and $6,100 in March The wholesale cost is 72 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 Which one of the following statements is correct?

A The February payments to suppliers are $2,992

B The March collections are $3,700

C The accounts receivable balance at the end of March is $4,400

D The purchases for February are $3,168

83 As of the beginning of the quarter, Swenson's, Inc had a cash balance of $460 During thequarter, the company collected $520 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?

84 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?

86 Fancy Footwear has a line of credit with a local bank in the amount of $80,000 The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent, which is based on 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 to borrow

$75,000 for one year to cover operating expenses?

89 The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 percent discount The average collection period is 34 days Assume that all accounts are collected in full What is the effective annual interest rate on this arrangement?

90 New York Bank provides Food Canning, Inc a $250,000 line of credit with an interest rate

of 1.75 percent per quarter The credit line also requires that 1 percent of the unused portion ofthe credit line be deposited in a non-interest bearing account as a compensating balance FoodCanning, Inc.'s short-term investments are paying 1.2 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

91 The Sports Store has a $100,000 line of credit with City Bank The loan agreement

requires that 2 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance The interest rate on the borrowed funds is 1.4 percent per quarter The Sport Store's short-term investments are paying 1.5 percent per quarter What is the effective annual interest rate on the line of credit if The Sports Store borrows the entire $100,000 for one year? Assume any funds borrowed or invested use

92 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 0.20 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

95 The Cement Works has a beginning cash balance for the quarter of $784 Susie, the firm's president, requires that a minimum cash balance of $800 be maintained and requires that 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 $3,918 and the quarterly disbursements are $3,774?

on this loan What is your anticipated loan balance at year end?

97 List and describe the three basic types of secured inventory loans Compare the

advantages and disadvantages of these loans

98 Using two separate graphs, illustrate a flexible and a restrictive short-term financing policy Place costs on the vertical axis and current assets on the horizontal axis On each graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal

investment in current assets

99 Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future How does this affect a firm's selection of a financing policy for its current assets?

100 Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower Why, then, would borrowers agree to such terms? What other types of alternative financing are available?

101 Details Corp has a book net worth of $8,150 Long-term debt is $1,650 Net working capital, other than cash, is $2,150 Fixed assets are $2,000 How much cash does the companyhave?

103 Consider the following financial statement information for the Bulldog Icers

105 Workout Together has projected the following sales for the coming year:

Sales in the year following this one are projected to be 18 percent greater in each quarter Assume the firm places orders during each quarter equal to 29 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?

at $720 The projected quarterly sales are:

What is the amount of the total disbursements for Quarter 2?

107 The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009:

The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000 of which was uncollected December sales.) What is the amount of the January collections?

108 Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:

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 2009, credit sales were $302,400, and credit purchases were $224,640 The April 1 cash balance was $403,200 What is the cash balance at the end of May?

109 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 0.5 percent per month In addition, 5 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?

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?

Chapter 18 Short-Term Finance and Planning Answer Key

Multiple Choice Questions

1 The length of time between the purchase of inventory and the receipt of cash from the sale

of that inventory is called the:

A operating cycle.

B inventory period

C accounts receivable period

D accounts payable period

Topic: Operating cycle

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

A operating cycle

B inventory period.

C accounts receivable period

D accounts payable period

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

A operating cycle

B inventory period

C accounts receivable period.

D accounts payable period

Topic: Accounts receivable period

4 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:

A operating cycle

B inventory period

C accounts receivable period

D accounts payable period.

5 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:

A operating cycle

B inventory period

C accounts receivable period

D accounts payable period

Topic: Cash cycle

6 A graphical representation of the operating and cash cycles is called a(n):

A operating chart

B cash flow time line.

C production flow line

7 Costs that increase as a firm acquires additional current assets are called _ costs

Topic: Carrying costs

8 Costs that decrease as a firm acquires additional current assets are called _ costs

9 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:

A pro forma income statement

Topic: Cash budget

10 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):

11 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:

Topic: Compensating balances

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

A accounts receivable financing.