Deck 26: Short-Term Finance and Planning

Question 1

A prearranged credit agreement with a bank typically open for two or more years is called a:

A)letter of credit.
B)cleanup loan.
C)compensating balance.
D)line of credit.
E)revolving credit arrangement.

Answer 1

revolving credit arrangement.

Question 2

Which one of the following is a source of cash?

A)An increase in trade receivables.
B)An increase in fixed assets.
C)A decrease in long-term debt.
D)The payment of a cash dividend.
E)An increase in trade payables.

Answer 2

An increase in trade payables.

Question 3

Net working capital is defined as:

A)the current assets in a business.
B)the difference between current assets and current liabilities.
C)the present value of short-term cash flows.
D)the difference between all assets and liabilities.
E)None of the above.

Answer 3

the difference between current assets and current liabilities.

Question 4

The length of time between the payment for inventory and the collection of cash from receivables is called the:

A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.

Question 5

The length of time between the acquisition of inventory and its sale is called the:

A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.

Question 6

Which one of the following will decrease the operating cycle?

A)Paying trade payables faster.
B)Discontinuing the discount given for early payment of a trade receivables.
C)Decreasing the inventory turnover rate.
D)Collecting trade receivables faster.
E)Increasing the trade payables turnover rate.

Question 7

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

A)compensating balance.
B)cleanup loan.
C)letter of credit.
D)line of credit.
E)roll-over.

Question 8

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

A)Using cash to pay a trade payables.
B)Using cash to pay a long-term debt.
C)Selling inventory at cost.
D)Collecting a trade receivables.
E)Using a long-term loan to buy inventory.

Question 9

Costs of the firm that fall with increased levels of investment in its current assets are called _____ costs.

A)carrying
B)shortage
C)debt
D)equity
E)payables

Question 10

The length of time between the sale of inventory and the collection of cash from receivables is called the:

A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.

Question 11

A short-term loan secured by the borrower's inventory, either directly or via an intermediary, is called a(n):

A)debenture.
B)line of credit.
C)banker's acceptance.
D)compensating balance.
E)inventory loan.

Question 12

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

A)Selling inventory at a profit.
B)Collecting a trade receivables.
C)Paying a payment on a long-term debt.
D)Selling a fixed asset for book value.
E)Paying a trade payables.

Question 13

The length of time between the acquisition of inventory and the collection of cash from receivables is called the:

A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.

Question 14

The forecast of cash receipts and disbursements for the next planning period is called a:

A)pro forma income statement.
B)statement of cash flows.
C)cash budget.
D)receivables analysis.
E)credit analysis.

Question 15

The length of time between the acquisition of inventory by a firm and the payment by the firm for that inventory is called the:

A)operating cycle.
B)inventory period.
C)trade receivables period.
D)trade payables period.
E)cash cycle.

Question 16

A type of short-term loan where the borrower sells its receivables to the lender up-front, but at a discount to face value, is called:

A)a compensating balance.
B)assigned receivables financing.
C)a letter of credit.
D)factored receivables financing.
E)a bond.

Question 17

A prearranged, short-term bank loan made on a formal or informal basis, and typically reviewed for renewal annually, is called a:

A)letter of credit.
B)cleanup loan.
C)compensating balance.
D)line of credit.
E)roll-over.

Question 18

A short-term loan where the lender holds the borrower's receivables as security is called:

A)a compensating balance.
B)assigned receivables financing.
C)a letter of credit.
D)factored receivables financing.
E)a bond.

Question 19

Which of the following are uses of cash? I.Marketable securities are sold.
II)The amount of inventory on hand is increased.
III)The firm takes out a long-term bank loan.
IV)Payments are paid on trade payables.

A)I and III only.
B)II and IV only.
C)I and IV only.
D)II and III only.
E)II, III and IV only.

Question 20

A _____ issued by a bank is a promise by that bank to make a loan if certain conditions are met.

A)compensating balance
B)cleanup loan
C)letter of credit
D)line credit
E)revolver

Question 21

An increase in which one of the following is most apt to be an indicator of a trade receivables policy that is too restrictive?

A)Bad debts
B)Trade receivables turnover rate
C)Trade receivables period
D)Credit sales
E)Operating cycle

Question 22

Which one of the following will not affect the operating cycle?

A)Decreasing the payables turnover from 7 times to 6 times.
B)Increasing the days sales in receivables.
C)Decreasing the inventory turnover rate.
D)Increasing the average receivables balance.
E)Decreasing the credit repayment times for the firm's customers.

Question 23

A flexible short-term financial policy:

A)increases the likelihood that a firm will face financial distress.
B)incurs an opportunity cost due to the rate of return that applies to short-term assets.
C)advocates a smaller investment in net working capital than a restrictive policy does.
D)increases the probability that a firm will earn high returns on all of its assets.
E)utilizes short-term financing to fund all of the firm's assets.

Question 24

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 they are needed in 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.

Question 25

A restrictive short-term financial policy tends to:

A)reduce future sales more so than a flexible policy.
B)grant credit to more customers.
C)incur more carrying costs than a flexible policy does.
D)encourage credit sales over cash sales.
E)reduce order costs as compared to a more flexible policy.

Question 26

Which one of the following will increase the trade payables period, all else constant?

A)An increase in the cost of goods sold account value.
B)An increase in the ending trade payables balance.
C)An increase in the cash cycle.
D)A decrease in the operating cycle.
E)A decrease in the average trade payables balance.

Question 27

Which one of the following will increase the cash cycle?

A)Improving the cash discounts given to customers who pay their accounts early.
B)Having a larger percentage of customers paying with cash instead of credit.
C)Buying less raw materials to have on hand.
D)Paying your suppliers earlier to receive the discount they offer.
E)Ordering raw materials inventory only when you need it.

Question 28

Which one of the following managers is most likely in charge of establishing the trade receivables policy?

A)Purchasing manager
B)Credit manager
C)Controller
D)Production manager
E)Payables manager

Question 29

Which one of the following will decrease the operating cycle?

A)Decreasing the days sales in inventory.
B)Decreasing the days in trade payables.
C)Decreasing the cash cycle by increasing the trade payables period.
D)Decreasing the trade receivables turnover rate.
E)Decreasing the speed at which inventory is sold.

Question 30

If you delay paying your suppliers by an additional ten days, then:

A)your payables turnover rate will increase.
B)you will require less bank financing of your operations.
C)the cash cycle will increase by ten days.
D)your operating cycle will lengthen by ten days.
E)your stock-out costs will rise.

Question 31

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

A)The cash cycle is equal to the operating cycle minus the inventory period.
B)A negative cash cycle is actually preferable to a positive cash cycle.
C)Granting credit to slower paying customers tends to decrease the cash cycle.
D)The cash cycle plus the trade receivables period is equal to the operating cycle.
E)The most desirable cash cycle is the one that equals zero days.

Question 32

Which of the following are associated with a restrictive short-term financial policy? I.Large investments in marketable securities.
II)Liberal credit terms for customers.
III)Minimal cash balances.
IV)Minimal credit sales.

A)I and III only.
B)I and IV only.
C)II and IV only.
D)III and IV only.
E)I, II and III only.

Question 33

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)Trade receivables period

Question 34

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 trade payabless 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)Adopting a more liberal trade receivables policy will tend to decrease the cash cycle.

Question 35

Which of the following actions will tend to decrease the trade receivables period? I.Loosening the standards for granting credit to customers.
II)Increasing the discount for early payment by credit customers.
III)Increasing the finance charges applied to all customer balances outstanding over thirty days.
IV)Granting discounts for cash sales.

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.

Question 36

The manager responsible for the accounting information concerning cash flows is the:

A)controller.
B)payables manager.
C)credit manager.
D)purchasing manager.
E)production manager.

Question 37

Flexible short-term financial policies tend to:

A)maintain low trade receivables balances.
B)support few investments in marketable securities.
C)minimize the investment in inventory.
D)maintain large cash balances.
E)tightly restrict credit sales.

Question 38

A flexible short-term financial policy:

A)is associated with firms where the carrying costs are considered to be less than the
Shortage costs.
B)applies mostly to firms where the shortage costs tend to be less than the carrying costs.
C)applies only to firms that strictly limit their credit sales.
D)tends to decrease the amount of current assets held by a firm.
E)is designed to utilize short-term external financing to fund all of the seasonal increases in
Current assets.

Question 39

ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer.The firm is now changing its policy and only producing 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 trade receivables period.
C)shorten the trade payables period.
D)decrease the cash cycle.
E)decrease the inventory turnover rate.

Question 40

A restrictive short-term financial policy, as compared to a more flexible policy, tends to: I.cause a firm to lose sales due to a lack of inventory on hand.
II)increase the sales of a firm due to the firm's credit availability and terms.
III)increase the probability that a firm will face a cash-out situation.
IV)increase the ability of a firm to charge premium prices.

A)I and III only.
B)II and IV only.
C)I and IV only.
D)II and III only.
E)I and II only.

Question 41

With a flexible policy with regard to short term financing, over a year a firm will have:

A)Some short-term borrowing.
B)Some funds to invest in marketable equity securities.
C)Full coverage of permanent current assets.
D)Both A and B are correct.
E)A, B and C are correct.

Question 42

A compensating balance: I.is required when a firm acquires bank financing other than a line of credit.
II)increases the cost of short-term bank financing.
III)represents an opportunity cost to the lending institution.
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)I, II and IV only.

Question 43

Which one of the following is an example of a cash disbursement?

A)Payments of accounts payable.
B)Wages, taxes and other expenses.
C)Capital expenditures.
D)Long-term financing.
E)All of the above.

Question 44

Which of the following are benefits of compiling a short-term financial plan? I.Knowing ahead of time when your firm will probably require external financing.
II)Being able to estimate how long of a time period your firm might need a loan.
III)Being able to determine when your firm can best afford to spend funds on a capital expenditure.
IV)Knowing when your firm should have excess funds that can be invested.

A)I and III only.
B)I, II and IV only.
C)II, III and IV only.
D)I, II and III only.
E)I, II, III and IV.

Question 45

Which of the following is not included in current assets?

A)Trade receivables
B)Accrued wages
C)Cash
D)Inventories
E)prepaid expenses

Question 46

The cash cycle is defined as the time between:

A)the arrival of inventory in stock and when the cash is collected from receivables.
B)selling the product and posting the trade receivables.
C)selling the product and collecting the trade receivables.
D)cash disbursements and cash collection.
E)the arrival of inventory and cash collection.

Question 47

Your firm collects 30% of sales in the month of sale, 55% of sales in the month following the month of sale and 13% of sales in the second month following the month of sale.Given this, you will collect
_____ sales during the month of June.

A)30% of May
B)55% of June
C)13% of May
D)55% of May
E)13% of March

Question 48

Which of the following is not included in current liabilities?

A)Trade payables
B)Prepaid insurance
C)Accrued expenses payable
D)Taxes payable
E)Notes payable

Question 49

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.

Question 50

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 time period covered by the loan agreement.
C)fact that the line of credit is a secured loan and the revolving credit arrangement is
Unsecured.
D)fact that the line of credit is an unsecured loan and the revolving credit arrangement is
Secured.
E)line of credit is a long-term financing agreement while the revolving credit arrangement is
A short-term financing agreement.

Question 51

If the average trade receivables that a firm holds decreases without any decrease in credit sales, the operating cycle will:

A)stay the same because of no sales change.
B)stay the same because cash collections are sooner, and it will affect the cash cycle only.
C)decreases because days sales outstanding decreases.
D)stay the same because trade receivables are not in the operating cycle.
E)have an unknown effect.

Question 52

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
Third 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 is most 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, equally.

Question 53

If your trade receivables period is 30 days, you will collect payment for your _____ sales during the second quarter of a calendar year.

A)January and February
B)January, February and March
C)February and March
D)February, March and April
E)March, April and May

Question 54

Which of the following statements are correct concerning the cash balance of a firm? I.Most firms plan on maintaining a minimum cash balance at all times.
II)The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus
The minimum cash balance retained by the firm.
III)The cumulative cash surplus at the end of March cannot be used as the beginning cash balance
For April when you are compiling a projected monthly cash balance report.
IV)A negative cumulative cash surplus indicates a borrowing need by the firm.

A)I and III only.
B)II and IV only.
C)I and IV only.
D)II and III only.
E)I and II only.

Question 55

A use of cash can be determined by:

A)A decrease in a liability.
B)An increase in an asset.
C)An increase in retained earnings.
D)Both B and C.
E)Both A and B.

Question 56

A cumulative cash deficit indicates that 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.

Question 57

The appropriate amount of short-term borrowing is determined by:

A)cash reserves.
B)maturity hedging.
C)relative interest rates.
D)term structure.
E)All of the above.

Question 58

Sources of cash do not include:

A)increases in borrowing from banks.
B)increases in cash inflow.
C)decreases in trade payables.
D)increases in notes payable.
E)increases in taxes payable.

Question 59

Which two of the following four conditions are most apt to cause a quarterly cash shortfall for a firm which is financially sound?
I.A relatively constant level of sales.
II.Periodic expenditures for major equipment purchases.
III.A steady dependence on a constant level of external financing.
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.

Question 60

Assets presented on the statement of financial position are in order of accounting liquidity. Accounting liquidity refers to:

A)how much inventory a brewer keeps.
B)a firm's ability to sell its product.
C)the risk of receiving payment on their accounts.
D)ability and time it takes to convert assets to cash.
E)None of the above.

Question 61

Weson has sales of £462,000, costs of goods sold of £308,000 and average trade receivables of £48,900.How long does it take its credit customers to pay for their purchases?

A)36.09 days.
B)38.63 days.
C)41.23 days.
D)44.20 days.
E)57.95 days.

Question 62

Bilt Rite has sales of £610,000.The cost of goods sold is equal to 70% of sales.The beginning trade receivables balance is £21,000 and the ending trade receivables balance is £25,000.How long on
Average does it take the firm to collect its receivables?

A)13.76 days.
B)14.09 days.
C)21.07 days.
D)25.98 days.
E)26.52 days.

Question 63

Your firm has sales of £628,000 and cost of goods sold of £402,000.At the beginning of the year, your inventory was £31,000.At the end of the year, the inventory balance was £33,000.What is the
Inventory turnover rate?

A)11.23 times.
B)12.56 times.
C)18.60 times.
D)19.63 times.
E)29.06 times.

Question 64

A firm has sales of £720,000.The cost of goods sold is equal to 70% of sales.The firm has an average inventory of £6,500.How many days on average does it take the firm to sell its inventory?

A)3.30 days.
B)4.71 days.
C)67.29 days.
D)77.54 days.
E)110.77 days.

Question 65

Jaxson and Sons has an inventory period of 33 days, a trade payables period of 41 days and a trade receivables period of 27 days.Management is considering offering a 5% discount if its credit
Customers pay for their purchases within 10 days.If the new discount is offered the trade
Receivables period is expected to decline by 13 days.If the new discount is offered, the operating
Cycle will decrease from _____ days to _____ days.

A)19; 6
B)60; 47
C)87; 74
D)101; 88
E)101; 91

Question 66

ABC has a beginning receivables balance on January 1st of £430.Sales for January through April are £240, £250, £330 and £350, respectively.The trade receivables period is 60 days.How much
Did the firm collect in the month of March? Assume that a year has 360 days.

A)£240
B)£250
C)£330
D)£350
E)£430

Question 67

A firm currently has a 43 day cash cycle.Assume that the firm changes its operations such that it increases its receivables period by 2 days, decreases its inventory period by 1 day and increases its
Payables period by 3 days.What will the length of the cash cycle be after these changes?

A)38 days.
B)39 days.
C)41 days.
D)43 days.
E)45 days.

Question 68

Dallas and More (D&M) sells its inventory in 82 days on average.Its average customer charges his purchase on a credit card whereby payment is received in ten days.On the other hand, D&M takes
56 days on average to pay for its purchases.Given this information, what is the length of D&M's
Operating cycle?

A)26 days.
B)36 days.
C)66 days.
D)92 days.
E)128 days.

Question 69

LoDo has sales of £642,000 and average trade payables of £36,400.The cost of goods sold is equivalent to 65% of sales.How long does it take LoDo to pay its suppliers?

A)11.46 days.
B)13.45 days.
C)20.69 days.
D)26.18 days.
E)31.84 days.

Question 70

A firm currently has a 36 day cash cycle.Assume that the firm changes its operations such that it decreases its receivables period by 4 days, increases its inventory period by 1 day and decreases
Its payables period by 2 days.What will the length of the cash cycle be after these changes?

A)31 days.
B)33 days.
C)35 days.
D)37 days.
E)38 days.

Question 71

Stoney Brooke has sales of £890,000 and cost of goods sold of £640,000.The firm had a beginning inventory of £36,000 and an ending inventory of £46,000.What is the length of the
Inventory period?

A)15.24 days.
B)15.61 days.
C)21.19 days.
D)21.71 days.
E)23.38 days.

Question 72

Dokos has a beginning receivables balance on January 1st of £560.Sales for January through to April are £620, £680, £570 and £550, respectively.The trade receivables period is 30 days.How
Much did the firm collect in the month of March? Assume that a year has 360 days.

A)£550
B)£570
C)£620
D)£625
E)£680

Question 73

Martinque and Son have a 60 day collection period.Sales for the next calendar year are estimated at £1,200, £1,100, £2,300 and £1,800, respectively, by quarter starting with the first quarter of the
Year.Given this information, which one of the following statements is correct? Assume that a year
Has 360 days.

A)The firm will collect £1,133 in Quarter 2.
B)The trade receivables balance at the beginning of Quarter 4 will be £767.
C)The firm will collect £367 from Quarter 2 sales in Quarter 3.
D)The firm will have a trade receivables balance of £1,200 at the end of the year.
E)The firm will collect a total of £1,967 in Quarter 4.

Question 74

Wislon has an inventory turnover rate of 15, a trade payables period of 54 days and a trade receivables period of 37 days.What is the length of the cash cycle?

A)-7.33 days.
B)-2.00 days.
C)2.00 days.
D)6.50 days.
E)7.33 days.

Question 75

True Blue Stores had a beginning trade payables balance of £56,900 and an ending trade payables balance of £62,800.Sales for the period were £670,000 and costs of goods sold were £418,000.
What is the payables turnover rate?

A)6.98 times.
B)7.35 times.
C)8.13 times.
D)11.19 times.
E)11.78 times.

Question 76

Cash cycle equals:

A)inventory period plus trade receivables period.
B)change in net working capital period.
C)operating cycle plus trade payables period.
D)operating cycle plus inventory period.
E)None of the above.

Question 77

Your firm currently has an operating cycle of 64 days.You are analyzing some operational changes which are expected to decrease the trade receivables period by 3 days and decrease the inventory
Period by 2 days.The trade payables turnover rate is expected to increase from 7 to 9 times per
Year.If all of these changes are adopted, what will your firm's new operating cycle be?

A)47 days.
B)51 days.
C)54 days.
D)57 days.
E)59 days.

Question 78

Drefus has an inventory turnover of 15 and a trade receivables turnover of 9.The trade payables period is 51 days.What is the length of the cash cycle?

A)13.89 days.
B)14.07 days.
C)14.23 days.
D)18.79 days.
E)23.00 days.

Question 79

Smith and Johnson have expected sales of £380, £340, £430 and £480 for the months of January through to April, respectively.The trade receivables period is 15 days.How much did the firm collect
In the month of March? Assume that a year has 360 days.

A)£340
B)£360
C)£385
D)£430
E)£455

Question 80

A firm has an inventory turnover rate of 16, a receivables turnover rate of 21 and a payables turnover rate of 11.How long is the operating cycle?

A)37.00 days.
B)40.19 days.
C)42.87 days.
D)63.08 days.
E)73.37 days.