Question 1

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):

Accepted Answer

A line of credit is an arrangement between a bank and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain.

Question 2

Which one of the following increases cash?

Accepted Answer

Accepting credit from a supplier increases cash flow because it allows the company to delay cash outflows for purchases, thereby not decreasing its cash balance immediately.

Question 3

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

Accepted Answer

Carrying costs increase as a firm acquires additional current assets because they include expenses such as storage, insurance, and handling that are directly related to the amount of inventory or other current assets on hand. Shortage costs (B) refer to expenses related to running out of inventory or other current assets, order costs (C) are expenses related to placing and receiving orders, safety costs (D) are expenses related to mitigating risk, and trading costs (E) are expenses related to buying and selling securities.

Question 4

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

Accepted Answer

II and IV only are uses of cash. Increasing inventory requires spending cash to purchase more goods, and paying a supplier for previous purchases also involves spending cash to settle debts.

Question 5

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

Accepted Answer

I. A decrease in inventory means a company is selling more than it is purchasing or producing, which generates cash.IV. The sale of preferred stock brings in cash as investors purchase the stock.

Question 6

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

Accepted Answer

Shortage costs decrease as a firm acquires additional current assets because there is less likelihood of running out of stock or not being able to meet short-term obligations, thus reducing the costs associated with shortages.

Question 7

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

Accepted Answer

Selling inventory at a profit on credit increases accounts receivable (an asset), without immediately affecting liabilities, thus increasing net working capital.

Question 8

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

Accepted Answer

III only. Increasing the operating cycle means it takes longer to convert resources into cash flows. Decreasing the receivable turnover rate slows down how quickly a company collects cash from its credit sales, thus extending the operating cycle. Increasing inventory turnover or decreasing inventory levels (I and IV) would actually shorten the operating cycle. Increasing the payables period (II) delays cash outflows but doesn't directly affect the speed of converting inventory to cash.

Question 9

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

Accepted Answer

A cash flow time line is a graphical representation of the operating and cash cycles. It shows the timing of cash inflows and outflows over a period of time.

Question 10

The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the:

Accepted Answer

The operating cycle is the time it takes for a company to purchase inventory, sell it, and collect cash from the sale.

Question 11

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:

Accepted Answer

The accounts payable period is the time between when a firm purchases an item from a supplier and when it pays the supplier for that purchase.

Question 12

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:

Accepted Answer

The answer of Central Supply purchased a toboggan for inventory...

Question 13

Which one of the following equals the operating cycle?

Accepted Answer

The operating cycle is the time it takes for a company to convert its inventory into cash. It is calculated by adding the inventory period (the time it takes to sell and replenish inventory) and the accounts receivable period (the time it takes to collect cash from customers). Therefore, B is the correct answer as it adds these two periods together to get the operating cycle.

Question 14

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

Accepted Answer

The accounts receivable period is the time it takes to collect payment after a sale has been made.

Question 15

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

Accepted Answer

Accounts receivable financing involves selling or assigning accounts receivable to a third party in exchange for immediate cash. This allows the business to access funds quickly instead of waiting for customers to pay their invoices.

Question 16

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

Accepted Answer

Pledging inventory as collateral is a common practice in obtaining an inventory loan. An inventory loan is a type of working capital loan that allows businesses to use their inventory as collateral, providing them with immediate access to capital. This type of loan is often used to help businesses manage their cash flow and fund their operations.

Question 17

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:

Accepted Answer

The report that Steve has prepared recapping the cash inflows and outflows for his hardware store is called a cash budget. A cash budget is a financial plan that outlines the expected sources and uses of cash for a specific period, usually a year. It helps business owners like Steve to track their cash flow and plan for future expenses and investments. Pro forma income statements and sales projections are financial statements used to forecast future revenue and expenses, while receivables analysis and credit analysis are tools used to evaluate a company's creditworthiness and collectability of accounts receivable.

Question 18

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

Accepted Answer

Paying a payment on a long-term debt will decrease the net working capital of a firm as it involves a cash outflow and reduces the amount of current assets available to the firm. Selling inventory at cost, collecting payment from a customer, selling a fixed asset for book value, and paying a supplier for the purchase of an inventory item either do not affect the net working capital or increase it.

Question 19

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:

Accepted Answer

A compensating balance is a minimum balance that must be maintained in a borrower's account as a condition for a loan, often earning little or no interest.

Question 20

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

Accepted Answer

The inventory period is the time it takes for a firm to sell its inventory after purchasing it.

Quiz 18: International Corporate Finance

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) :