Deck 20: Short-Term Financial Planning

Question 1

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

Answer 1

True

Question 2

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

Answer 2

False

Question 3

Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.

Answer 3

False

Question 4

Company which borrows $1 million long-term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Question 5

An increase in short-term interest rates will increase the carrying costs of the firm.

Question 6

Carrying costs are the cost of holding inventory.

Question 7

Net working capital will decrease when a firm buys raw materials on credit.

Question 8

Permanent working capital requirements can be financed using commercial paper.

Question 9

Working capital, correctly defined, includes both current assets and current liabilities.

Question 10

Company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.

Question 11

Company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

Question 12

When accounts payable exceed the sum of inventory and accounts receivable, net working capital is negative.

Question 13

A firm can reduce the cash conversion cycle by selling fewer goods on credit.

Question 14

An increase in current liabilities is a source of cash for the firm.

Question 15

The lower the average level of inventory, the more profitable the firm.

Question 16

An increase in long-term assets is a source of cash.

Question 17

An increase in accounts payable is a source of cash.

Question 18

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.

Question 19

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see a $2,500 increase in cash.

Question 20

A firm's inventory period can be estimated by the ratio of average inventory to daily output.

Question 21

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Question 22

How high can accounts receivable be allowed to grow before the firm's receivables period exceeds 50 days if annual sales equal $5 million and the cash conversion cycle equals 75 days?

A)$342,466
B)$684,932
C)$1,027,397
D)$1,712,329

Question 23

Determine the value of Accounts Payable given the following information: $$\begin{array} { | l | c | } \hline { \text { Data: } } & \\\hline \text { Average Irveritory } & 3,000.00 \\\hline \text { Average AR } & 5,000.00 \\\hline \text { Average AP } & ? \\\hline \text { sales } & 40,000.00 \\\hline \text { COGs } & 30,000.00 \\\hline \text { Cash Corversion Cycle } & 64.48 \\\hline \text { Irventory Period } & 36.50 \\\hline \text { Receivable Period } & 45.63 \\\hline\end{array}$$

A)$4,450
B)$3,450
C)$2,450
D)$1,450

Question 24

What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000 higher than ending, and $20,000 was collected?

A)$19,000
B)$20,000
C)$21,000
D)$24,000

Question 25

What is the annual cost of goods for a firm, with accounts payable period of 35 days and average accounts payable of $600,000.

A)$5,753,425
B)$6,171,429
C)$6,257,143
D)$17,142,857

Question 26

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

Question 27

During the year the following changes were observed. (I.) Inventory period increased by 12 days
(II)) Receivables period decreased by 6 days
(III.) Accounts payable period increased by 4 days
Find the net change in cash conversion cycle.

A)-10 days
B)+2 days
C)+10 days
D)+14 days

Question 28

With a line of credit, a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit.

Question 29

Calculate the change in cash given the following information: $$\begin{array} {| l | r| } \hline \text { Increase in AR } & 5,000 \\\hline \text { Decrease in Inventory } & 25,000 \\\hline \text { Decrease in Accounts Payable } & 10,000 \\\hline \text { Increase in Taxes Payable } & 2,500 \\\hline \text { Issued Long Term Debt } & 300,000 \\\hline \text { Issued Common Shares } & 250,000 \\\hline \text { Issued Dividends } & 60,000 \\\hline\end{array}$$

A)$532,500
B)$522,500
C)$512,500
D)$502,500

Question 30

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.The risk of default on the receivables is now borne by the bank.

Question 31

Calculate the value of Accounts Receivable, given the following information: $$\begin{array} { | l | c | } \hline \text { Data: } & \\\hline \text { Average Inventory } & 7,000.00 \\\hline \text { Average AR } & ? \\\hline \text { Average AP } & 3,500.00 \\\hline \text { Sales } & 120,000.00 \\\hline \text { COGS } & 95,000.00 \\\hline \text { Cash Conversion Cycle } & 51.47 \\\hline \text { Inventory Period } & 26.89 \\\hline \text { Payables Period } & 13.45 \\\hline\end{array}$$

A)$10,500
B)$11,500
C)$12,500
D)$13,500

Question 32

Calculate the effective rate of 12% compounded quarterly.

A)11.55%
B)12.55%
C)13.55%
D)14.55%

Question 33

The cost of issuing commercial paper is generally lower than that of a line of credit.

Question 34

The following information is for the month of January. $$\begin{array} { | l | l | c | } \hline \text { (I.) } & \text { Beginning accounts receivable } & = \$ 40 \text { million } \\\hline \text { (II) } & \text { Sales for January } & = \$ 160 \text { million } \\\hline \text { (III) } & \text { Collection for January } & = \$ 145 \text { million } \\\hline\end{array}$$ Find the ending accounts receivable for January.

A)$25 million
B)$55 million
C)$75 million
D)$265 million

Question 35

Once the firm has sold its receivables, the non-recourse factors bear all the responsibility for collecting on the account.

Question 36

The factoring firm, under the terms recourse, bears responsibility for default on accounts receivable purchased from a firm.

Question 37

Field warehousing is a system of protecting the borrower against spoiled or stolen inventory.

Question 38

Calculate the Cash Conversion and Operating cycle, given the following information: $$\begin{array} { | l | c | } \hline \text { Data: } & \\\hline \text { Average Inventory } & 1,500.00 \\\hline \text { Average AR } & 2,500.00 \\\hline \text { Average AP } & 650.00 \\\hline \text { sales } & 12,000.00 \\\hline \text { COGB } & 9,500.00 \\\hline\end{array}$$

A)107 days and 132 days
B)109 days and 134 days
C)111 days and 136 days
D)113 days and 138 days

Question 39

Calculate the cash balance given the following information: $$\begin{array} {| l | r | } \hline \text { Decrease in AR } & 30,000 \\\hline \text { Increase in Inventory } & 70,000 \\\hline \text { Increase in Accounts Payable } & 45,000 \\\hline \text { Decrease in Taxes Payable } & 8,000 \\\hline \text { Repaid Long Term Debt } & 90,000 \\\hline \text { Issued Common Shares } & 160,000 \\\hline \text { Issued Dividends } & 25,000 \\\hline\end{array}$$

A)$48,000
B)$45,000
C)$42,000
D)$39,000

Question 40

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

A)$55 million
B)$58 million
C)$88 million
D)$98 million

Question 41

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

A)21.00%
B)21.20%
C)23.14%
D)37.93%

Question 42

Your accountant suspects a mistake in the computation of the payables period, which has been reported at 54.75 days.Calculate the correct payables period, given the following: annual sales = $1,200,000, annual cost of goods sold = $700,000, average accounts payable = $105,000.

A)31.94 days
B)54.75 days
C)179.58 days
D)212.92 days

Question 43

Calculate the accounts receivable period for a firm with annual credit sales of $10 million and average accounts receivable of $2 million.

A)18.25 days
B)20.00 days
C)51.00 days
D)73.00 days

Question 44

A firm borrows $200,000 from the bank, but has to maintain a compensating balance of $15,000 with the bank.The annual interest rate for the loan is 13%.What is the effective annual rate if the interest is compounded annually?

A)12.03%
B)13.00%
C)14.05%
D)14.41%

Question 45

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 2% discount and the average collection period is 1 month?

A)19.40%
B)24.00%
C)26.53%
D)27.43%

Question 46

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 45 days, and an annual cost of goods sold of $18 million?

A)14.59 days
B)46.25 days
C)75.41 days
D)136.25 days

Question 47

What strategy regarding long- versus short-term financing is not being followed if managers resort to short-term investing during downturns in the business cycle?

A)a relaxed strategy
B)a middle-of-the-road strategy
C)a restrictive strategy
D)both b and c above

Question 48

A firm sells its accounts receivable to a factor at a 5% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

A)90.06%
B)85.06%
C)80.06%
D)75.06%

Question 49

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

A)27.43%
B)48.00%
C)60.10%
D)63.21%

Question 50

Ignoring defaults, what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

A)19.40%
B)24.00%
C)26.53%
D)27.75%

Question 51

What is the payable period for a firm with average accounts payable of $4 million and annual cost of goods sold of $44 million?

A)20.0 days
B)30.0 days
C)35.6 days
D)33.2 days

Question 52

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded semi-annually?

A)12.03%
B)13.00%
C)14.05%
D)15.56%

Question 53

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded monthly?

A)12.03%
B)13.00%
C)14.05%
D)16.08%

Question 54

What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?

A)10 days
B)50 days
C)70 days
D)130 days

Question 55

If the effective rate of interest if 15.55% based on monthly compounding, determine the nominal rate of interest.

A)17.54%
B)16.54%
C)15.54%
D)14.54%

Question 56

A firm's inventory and accounts payable periods are 80 and 42 days respectively.How long can the firm's receivables period be in order to have no longer than a 65 day cash conversion cycle?

A)27 days
B)38 days
C)57 days
D)103 days

Question 57

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

A)12.03%
B)13.00%
C)14.05%
D)15.87%

Question 58

Calculate the Cash Conversion and Operating cycle, given the following information: $$\begin{array} { | l | c | } \hline \text { Data: } & \\\hline \text { Average Inventory } & 840.00 \\\hline \text { Average AR } & 600.00 \\\hline \text { Average AP } & 1,200.00 \\\hline \text { sales } & 7,000.00 \\\hline \text { COGB } & 6,000.00 \\\hline\end{array}$$

A)9.39 days and 82.39 days
B)15.45 days and 101.52 days
C)17.67 days and 111.56 days
D)20.25 days and 115.50 days

Question 59

A firm sells its accounts receivable to a factor at a 2% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

A)27.43%
B)28.53%
C)29.63%
D)30.73%

Question 60

What is the inventory period for a firm with an annual cost of goods sold of $8 million, $1.5 million in average inventory, and a cash conversion cycle of 75 days?

A)6.56 days
B)18.75 days
C)53.33 days
D)68.44 days

Question 61

Which of the following would not be considered a use of cash?

A)dividends
B)decreased accounts payable
C)depreciation
D)increased accounts receivable

Question 62

Field warehousing can be an important source of:

A)additional storage space for cash-strapped firms
B)investing for those who follow the "relaxed cash strategy"
C)cash management for those who factor receivables
D)short-term financing with low risk to the lender

Question 63

Which of the following would not be included in a cash budget?

A)income tax payments
B)cash receipts
C)dividend payments
D)depreciation

Question 64

The time interval between paying for raw materials and collecting on sales of finished goods is known as the:

A)inventory cycle
B)matching cycle
C)cash conversion cycle
D)accounts receivable cycle

Question 65

Which of the following statements is correct concerning marketable securities on a firm's balance sheet?

A)all are Canadian government obligations
B)all earn interest income
C)all are without price risk
D)not all are guaranteed against loss

Question 66

Which of the following is correct for a firm that reduces its accounts receivable balance from the previous quarter?

A)collections exceeded beginning receivables balance
B)sales exceeded collections
C)beginning receivables balance exceeded sales
D)collections exceeded sales

Question 67

Which of the following would act to reduce the carrying costs of inventory?

A)the inventory is capable of spoiling
B)the inventory will rapidly go out of style
C)general interest rates decrease in the economy
D)general interest rates increase in the economy

Question 68

Bank lines of credit must be judiciously requested because the lines often:

A)accrue interest regardless of whether funds are borrowed
B)require payment of a commitment fee to establish
C)appear as a liability on the firm's balance sheet
D)have a negative impact on the firm's credit history

Question 69

Ignoring the risk of theft, cash balances cannot spoil, yet managers are concerned with carrying costs.Why?

A)the federal government may devalue the currency
B)higher balances require additional supervisors
C)cash balances are idle and face an opportunity cost
D)embezzlement is a real risk in most firms

Question 70

Managers are alerted to projected cash shortages by way of the:

A)statement of sources and uses of cash
B)pro forma balance sheet
C)cash budget
D)monthly bank statements

Question 71

The goal of managing working capital, such as inventory, should be to minimize the:

A)costs of carrying inventory
B)opportunity cost of capital
C)aggregate of carrying and shortage costs
D)amount of spoilage or pilferage

Question 72

If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?

A)net working capital increases
B)net working capital decreases
C)current ratio increases
D)current ratio decreases

Question 73

Optimizing cash balances involves the equating of:

A)total benefits and total opportunity costs
B)average benefits and average opportunity costs
C)accounts receivable and accounts payable
D)marginal benefits and marginal opportunity costs

Question 74

A firm has borrowed $1 million and assigned its receivables to the lender.Because of defaults, the receivables prove insufficient to cover the debt.In this case, the:

A)lender bears the risk of default
B)firm bears the risk of default
C)default risk is shared between lender and firm
D)insurance carrier will bear the risk

Question 75

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable (due for 90 days.) The net effect of these transactions on the firm's net working capital is:

A)decrease of $1,700,000
B)decrease of $1,000,000
C)decrease of $700,000
D)decrease of $300,000

Question 76

When product demand is high, firms following a "middle of the road policy" for long- versus short-term financing will:

A)borrow short-term
B)borrow long-term
C)hold marketable securities
D)sell marketable securities

Question 77

When a firm finances long-term assets with short-term sources of funding, it:

A)reduces the risk of cash shortage
B)will have lower interest expense
C)improves the leverage ratio
D)is ignoring the principle of matched maturities

Question 78

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? (I.) Current assets increase by $170,000.
(II)) Current liabilities decrease by $60,000.

A)Increase by $110,000
B)Increase by $230,000
C)Decrease by $110,000
D)Decrease by $230,000

Question 79

The safety margin kept by the bank on loan against liquid assets is called:

A)a haircut
B)a line of credit
C)factoring
D)filed warehousing

Question 80

A line of credit would be considered:

A)an agreement to borrow up to a specific total amount on demand from a bank.
B)a short-term unsecured loan with minimum interest expense.
C)a secured loan to be amortized over three to five years.
D)a long-term, permanent source of funding.