Question 1

Managers who "stretch their payables" are attempting to:

Accepted Answer

Managers who "stretch their payables" are attempting to obtain a longer term for short-term financing by delaying payment of their bills to conserve cash for other immediate needs. This helps to manage cash flow pressures and maintain liquidity in the short term.

Question 2

Which one of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

Accepted Answer

An increase in accounts receivable balances can be a positive indicator if it is associated with an increase in sales levels. This suggests that the company is generating more business, leading to higher receivables.

Question 3

A firm sells its $1,000,000 of receivables to a factor for $960,000. What is the effective annual rate on this arrangement if the average collection period is one month?

Accepted Answer

EAR = [1 + ($1m - 960,000)/960,000]¹² - 1 = 0.6321, or 63.21%

Question 4

For the period, a firm collected $38,200 on accounts receivable, paid $19,700 to suppliers on trade credit, paid $12,000 in cash expenses, purchased for cash a $42,000 piece of equipment that will be depreciated straight-line to zero over 4 years, and had $59,000 of sales of which 15% were cash sales. The firm also paid $13,500 in taxes and interest. The beginning cash balance was $11,300. How much must the firm borrow if it wishes to maintain a minimum cash balance of $10,000?

Accepted Answer

Cash balance = $11,300 + 38,200 - 19,700 - 12,000 - 42,000 + (0.15 × $59,000) - 13,500 - 10,000 = -$38,850; Thus, the firm needs to borrow $38,850.

Question 5

If a firm decided to reduce the receivables period by speeding up its collections from its customers while keeping the inventory period and payables period the same, then the:

Accepted Answer

The cash conversion cycle is defined as the time it takes for a firm to convert its resources invested in inventory and receivables into cash. By reducing the receivables period, the firm will be able to collect cash from its customers more quickly, which will decrease the cash conversion cycle. The inventory period and payables period remaining the same does not impact the calculation of the cash conversion cycle. Therefore, option B is correct. Option A is incorrect because if the cash conversion cycle decreases, it means that the firm can release cash into its operations sooner, which is a favorable outcome. Option C is incorrect because the reduction in the receivables period will not minimize the investment in working capital since the firm will still have inventory and payables to manage. Option D is incorrect because a decrease in the cash conversion cycle and increasing net working capital are contradictory.

Question 6

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

Accepted Answer

Cash shortages can be identified through cash budgeting, which is a tool used to project cash inflows and outflows for a specific period. By analyzing the projected cash flows, managers can identify any expected cash deficits and take corrective actions to avoid cash shortages. The other options, including the statement of sources and uses of cash, pro forma balance sheet, and monthly bank statements, may provide valuable information on cash flows but are not specifically designed to identify cash shortages.

Question 7

Although commercial paper is unsecured, the companies that issue this short-term security are:

Accepted Answer

Commercial paper is typically issued by large firms with top credit quality, as they are able to easily access the market and have a lower risk of default. This helps to make commercial paper a relatively low-risk investment option despite being unsecured.

Question 8

What will be the change in net working capital if current assets increase by $170,000 and current liabilities decrease by $60,000?

Accepted Answer

∆NWC = $170,000 - (-$60,000) = $230,000

Question 9

Which one of the following would not be included as a source of short-term financing?

Accepted Answer

Increasing the minimum operating cash balance refers to the amount of cash a company must maintain on hand to operate normally. This is not a source of short-term financing. The other options, such as a line of credit, sale of marketable securities, and stretching of accounts payable, are all common sources of short-term financing.

Question 10

A self-liquidating line of credit is best illustrated by borrowing:

Accepted Answer

A self-liquidating line of credit is a type of financing used to purchase inventory, which is then sold to generate revenue used to repay the loan. Option B accurately describes this process, where the loan is used to purchase inventory and then repaid when the payment for that inventory is received.

Question 11

The Boat Works started the month with $1.28 million in accounts receivable. Sales for the month were $3.4 million. The firm collects 35% of its sales in the month of sale with the remainder paid the following month. What is the accounts receivable balance at month end?

Accepted Answer

Ending A/R = $1.28m + 3.4m - 1.28m - (0.35 × $3.4m) = $2.21m

Question 12

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.
What is the net change in the cash conversion cycle?

Accepted Answer

∆Cash conversion cycle = 12 - 6 - 4 = 2 days

Question 13

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?

Accepted Answer

Q2 collections = (1 - 0.80) × $50m + 0.80 × $60m = $58m

Question 14

Which one of these will decrease net working capital?

Accepted Answer

When inventory is sold at a loss, it decreases the amount of cash received and reduces the value of inventory, which in turn decreases net working capital.

Question 15

Field warehousing can be an important source of:

Accepted Answer

Field warehousing is a form of inventory financing where goods are stored in a warehouse under the control of a third party but remain the property of the borrower. This arrangement provides short-term financing for the borrower, as they can use the stored goods as collateral for loans, and it presents low risk to the lender since the goods can be sold to recover the loan if the borrower defaults.

Question 16

Issuing additional long-term debt of $5 million and buying new long-term assets worth $4 million and short-term assets of $1 million will result in a net cash flow of _____ and a change in net working capital of ____.

Accepted Answer

Issuing new long-term debt is a source of capital and buying new assets is a use of cash. So, the net cash flow is zero. Net working capital increases by the $1 million invested in short-term assets.

Question 17

In the preparation of cash budgets, capital expenditures are:

Accepted Answer

Capital expenditures are included as uses of cash and can make the budget lumpy, as they require large amounts of cash to be spent at specific points in time. They are not considered sources of operating cash, nor are they offset by interest income. While they are depreciated over time, they still represent a significant cash outflow in the period they are incurred.

Question 18

A firm that follows a relaxed strategy toward the total capital requirement will be a:

Accepted Answer

The answer of A firm that follows a relaxed strategy...

Question 19

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

Accepted Answer

A/P period = 35 = $600,000/(COGS/365); COGS = $6,257,143

Question 20

The Boat Works started the month with $3.21 million in accounts receivable. Sales for the month were $7.84 million. The firm collects 18% of its sales in the month of sale with the remainder paid the following month. What is the accounts receivable balance at month end?

Accepted Answer

Ending A/R = $3.21 + 7.84m - 3.21m - (0.18 × $7.84m) = $6,428,800

Quiz 19: Short-Term Financial Planning