Deck 5: Managing Day-To-Day Cash Flow

Question 1

The cash flow cycle also is known as the:

A)cash conversion cycle.
B)cash-to-cash cycle.
C)working capital cycle.
D)revolving credit cycle.

Answer 1

A

Question 2

________ refers to the continual process of generating cash through sales,preserving cash by taking advantage of credit offered by suppliers,and utilizing cash by investing in inventory and offering credit to customers.

A)The cash flow cycle
B)The working capital cycle
C)The accounting equation
D)The dual-entry accounting system

Answer 2

A

Question 3

Your new firm is operating in an all-cash environment without taxes.You sold $1,000 of inventory for three times the amount you paid for it.The accounting entries you would make for this transaction are:

A)$1000 increase in cash,$1,000 decrease in inventory.
B)$2,000 increase in cash.
C)$3,000 increase in cash,$1,000 decrease in inventory,$2,000 increase in accounts receivable.
D)$3,000 increase in cash,$1,000 decrease in inventory,$2,000 increase in retained earnings.

Answer 3

D

Question 4

A firm's balance sheet shows the following changes over the most recent quarter: Cash increases by $1,000,000,long-term assets increase by $3,000,000,accounts payable increase by $750,000,long-term-debt increases by $1,000,000,retained earnings increase by $1,250,000,and new equity increases by $1,000,000.Which of the following statements must be TRUE?

A)Cash was a $1,000,000 source of funds for the firm.
B)Long-term debt was a $1,000,000 source of funds for the firm.
C)Because retained earnings increased by more than $500,000,the firm could not have realized a profit for the quarter.
D)All of the new equity must have been provided by investors who were not shareholders prior to the issuance of new equity.

Question 5

A firm has a net income (after-tax profit)of $500,000 and pays dividends of $150,000.Which of the following statements is true?

A)Cash decreased by $150,000
B)Retained earnings increased by $350,000
C)Long-term debt increased by $350,000
D)All of the statements are true.

Question 6

Your new firm is operating in an all-cash environment without taxes.You sold $1,000 of inventory for three times the amount you paid for it.If this was the only transaction,which of the following would most closely match the entries on your income statement?

A)Revenues = $1,000,expenses = $1,000,profit = $0
B)Cash increases by $3,000,inventory decreases by $1,000,and retained earnings increases by $2,000.
C)Revenues = $3,000,expenses = $0,profit = $3,000
D)Revenues = $3,000,expenses = $1,000,profit = $2,000

Question 7

The simple accounting equation may be written as:

A)liabilities = assets + equity.
B)assets = liabilities + equity.
C)equity = liabilities + assets.
D)assets = liabilities - equity.

Question 8

If a firm purchases $1,000 of inventory on credit,this should have the following change on the balance sheet:

A)a $1,000 decrease in inventory and a $1,000 increase in retained earnings.
B)a $1,000 increase in inventory and a $1,000 decrease in cash.
C)a $1,000 increase in inventory and a $1,000 increase in accounts payable.
D)a $1,000 increase in inventory and a $1,000 increase in equity.

Question 9

Your new firm borrows $10,000.This would be considered a/an ________ activity.

A)investing
B)financing
C)operations
D)ill advised

Question 10

A firm's balance sheet shows the following changes over the most recent quarter: Cash increases by $1,000,000,long-term assets increase by $3,000,000,accounts payable increase by $750,000,long-term-debt increases by $1,000,000,retained earnings increase by $1,250,000,and new equity increases by $1,000,000.Which of the following statements must be FALSE?

A)Cash was a $1,000,000 source of funds for the firm.
B)Long-term debt was a $1,000,000 source of funds for the firm.
C)The purchase of long-term assets was a use of funds by the firm.
D)Retained earnings are considered an INTERNAL source of financing.

Question 11

Which of the following is NOT a potential use of cash for a firm?

A)An increase in inventory
B)An increase in plant,property,or equipment
C)An increase in long-term debt
D)A decrease in accounts payable

Question 12

Which of the following is NOT a potential source of cash for a firm?

A)A decrease in Accounts receivable
B)A decrease in inventory
C)An increase in retained earnings
D)A decrease in equity

Question 13

Your firm decides to increase equity by $1,000,000.Which of the following sets of transactions could NOT be appropriate ledger entries?

A)Increase equity by $1,000,000 and increase long-term assets by $1,000,000
B)Increase equity by $1,000,000,decrease long-term debt by $500,000,and increase inventory by $500,000
C)Increase equity by $1,000,000 and increase inventory by $1,000,000
D)All of the above transactions would be appropriate.

Question 14

Your new firm just purchased a storage building and property for $40,000 that was paid for with a $20,000 long-term loan and a new infusion of $20,000 from the owners.Which of the following accounting entries is most appropriate?

A)$40,000 increase in plant,property and equipment,a $20,000 decrease in long-term debt,and a $20,000 decrease in owners equity.
B)$40,000 increase in plant,property and equipment,a $20,000 increase in long-term debt,and a $20,000 increase in owners equity.
C)$40,000 increase in cash and a $40,000 increase in plant,property,and equipment.
D)$40,000 increase in plant,property and equipment and a $40,000 increase in cash.

Question 15

Your new firm uses cash on hand to purchase $5,000 of inventory.The two accounting transactions are to ________ cash by $5,000 and to ________ inventory by $5,000.

A)decrease; increase
B)decrease; decrease
C)increase; increase
D)increase; decrease

Question 16

Chapter 5 focuses on growing profits,dividends,and cash flow by examining the ________ part of the enterprise.

A)financing
B)investing
C)operating
D)accounting

Question 17

The process whereby every transaction or event has at least two accounting entries is known as:

A)the accounting equation.
B)ledger accounting.
C)double-entry bookkeeping.
D)the cash equation.

Question 18

Which of the following is NOT a potential source of cash for a firm?

A)Repayment of a short-term loan
B)An increase in equity
C)An increase in long-term debt
D)A decrease in property,plant,or equipment

Question 19

Which of the following is NOT a potential use of cash for a firm?

A)An increase in accounts receivable
B)An increase in taxes payable
C)A decrease in long-term debt
D)A decrease in retained earnings

Question 20

Your firm has a beginning balance of $8,000 cash,$2,000 inventory,and $10,000 initial equity.Your firm is operating in an all-cash environment without taxes.You sold $1,000 of inventory for three times the amount you paid for it.If this is your only transaction,your resulting balance sheet should most closely resemble which of the following choices?

A)Cash = $8,000,accounts receivable = $3,000,inventory = $1,000,initial equity = $10,000,and retained earnings = $2,000
B)Cash = $11,000,inventory = $1,000.initial equity = $10,000,and retained earnings = $2,000
C)Cash $11,000,inventory = $2,000,initial equity $10,000,and retained earnings $3,000
D)Cash $11,000,inventory = $2,000,and initial equity = $13,000

Question 21

Which of the following actions could INCREASE a firm's working capital gap?

A)reduce the age of inventory
B)increase the age of accounts payable
C)increase the age of accounts receivable
D)All actions listed would increase a firm's working capital gap.

Question 22

Which of the following definitions of working capital gap (WCG)is accurate?

A)WCG = age of inventory - age of receivables - age of payables
B)WCG = Age of receivables - age of inventory - age of payables
C)WCG = age of payables - age of inventory - age of receivables
D)WCG = age of inventory + age of receivables - age of payables

Question 23

Which of the following is NOT an example of a type of inventory management activity?

A)JIT or just-in-time inventory control system
B)RFI or radio frequency identification systems.
C)EOQ or economic order quantity formulas.
D)All of the above are forms of inventory control.

Question 24

A firm's balance sheet is all about investing and financing and describes nothing about a firm's operations.

Question 25

Which of the following is NOT a potential cost of granting trade credit?

A)Delayed receipt of cash from sales
B)Lost cash due to customers taking an offered discount for earlier payment
C)Lost receipts due to inability of customers to pay agreed to credit terms
D)Increased sales

Question 26

What is the percentage cost of foregoing the payable discounts when the terms are 1/15 net 45 (rounded to the nearest whole percentage point)?

A)8%
B)10%
C)12%
D)14%

Question 27

What is the percentage cost of foregoing the payable discounts when the terms are 3/15 net 60 (rounded to the nearest whole percentage point)?

A)18%
B)25%
C)37%
D)There is not enough information provided to answer this question.

Question 28

Which of the following in NOT a potential benefit of granting trade credit?

A)Enhances competitiveness for the firm granting credit.
B)A delay in receiving payment from customers.
C)May assist in generating additional sales.
D)May allow quicker movement of inventory.

Question 29

Laminates Inc.has as age of inventory of 43 days,an age of receivables of 47 days and an age of payables of 61 days.Their closest competitor,Natural Inc.,has comparable numbers of 51 days,32 days and 55 days.Which of the following statements is true?

A)Laminates has the shorter and more desirable working capital gap of 57 days compared to Natural's WCG of 74 days.
B)Laminates has the longer and less desirable working capital gap of 65 days compared to Natural's WCG of 36 days.
C)Laminates has the shorter and less desirable working capital gap of 28 days compared to Natural's WCG of 49 days.
D)Laminates has the longer and less desirable working capital gap of 29 days compared to Natural's WCG of 28 days.

Question 30

Which of the following trade credit terms for goods and services purchased would be preferred by a firm?

A)2/10 net 30
B)3/10 net 45
C)3/15 net 45
D)Unless we know the firm's cost of borrowing we cannot determine which set of terms is preferred.

Question 31

Which of the following trade credit terms for goods and services purchased would be least desireable to the purchasing firm?

A)2/10 net 30
B)1/10 net 30
C)3/15 net 30
D)Unless we know the firm's cost of borrowing we cannot determine which set of terms is least preferred.

Question 32

Which of the following actions could INCREASE a firm's working capital gap?

A)increase the age of accounts payable
B)decrease the age of accounts receivable
C)reduce the age of inventory
D)None of the above.

Question 33

Ending cash = Sources of cash - Uses of cash + beginning cash balance

Question 34

The left side of the balance sheet should represent investments made by the firm and the right side should represent the sources of financing.

Question 35

Which of the following actions could DECREASE a firm's working capital gap?

A)increase the age of accounts receivable
B)reduce the age of accounts payable
C)increase the age of inventory
D)None of the above.

Question 36

The practice of extending credit to customers is known as:

A)float.
B)trade credit.
C)forfaiting.
D)discounting.

Question 37

Decreases in assets and increases in liabilities and equity represent SOURCES of cash.

Question 38

Which of the following is NOT a cost associated with holding inventory?

A)Money tied up in holding inventory is not available for other purposes.
B)Inventory generates storage and insurance costs.
C)The ability to meet a surge in demand for the goods carried in inventory.
D)Items in inventory may become obsolete and unsellable at a profitable price.

Question 39

Increases in assets and decreases in liabilities and equities represent SOURCES of cash.

Question 40

Which of the following actions could DECREASE a firm's working capital gap?

A)reduce the age of inventory
B)reduce the age of accounts payable
C)increase the age of accounts receivable
D)All actions listed would decrease a firm's working capital gap.

Question 41

For a retail firm,it is unlikely that the working capital gap would change from period to period as a function of cyclical sales.

Question 42

Managing inventory involves trading off the benefits of availability with various financial concerns such as storage,insurance,and obsolescence.

Question 43

The author presents evidence that recently Southwest Airlines had a negative working capital gap.Which of the following reasons is likely to be primarily responsible for this enviable situation.

A)Southwest borrows a lot of money short-term thus keeping their borrowing costs low.
B)Southwest receives payment from customers in advance of most flights.
C)Southwest pays for fuel far in advance of the flights.
D)Southwest grants unusually long credit terms to encourage high levels of accounts receivable

Question 44

Your firm issues 20-year bonds.This type of financing would be most appropriate for which of the following activities?

A)The support of accounts receivable
B)The construction of a new warehouse
C)The support of accounts payable
D)The financing of inventory

Question 45

Describe what an accounts receivable schedule might look like and why a firm may wish to prepare such a schedule.

Question 46

Empirical evidence suggests that retail firms such as Safeway have a shorter working capital gap than a heavy manufacturing firm such as Boeing.

Question 47

Your firm borrows money from the bank on a short-term note due in 9 months.This type of financing would be most appropriate for which of the following activities?

A)The support of accounts receivable
B)The construction of a new warehouse
C)The support of accounts payable
D)The financing of new equity

Question 48

Other things equal,it is more desirable to have a larger working capital gap.

Question 49

The average working capital gap seems to differ across industries in the United States.

Question 50

Which of the following statements about inventory control is TRUE?

A)Too little inventory may lead to opportunity costs in the form of missed sales.
B)Too much inventory may reduce profitability due to increased financing and storage costs.
C)Seasonality in sales may require a firm to hold different levels of inventory throughout the year.
D)All of the statements about inventory control are true.

Question 51

"The Holiday Store" is a retail firm that is only open in the weeks prior to major American holidays.The rest of the year the store is closed to the public for in-store and on line sales.The store is well-managed and manages to sell a very high percentage of its inventory each holiday season.The store's working capital gap is likely:

A)to be the same at any particular date during the year.
B)lowest in the weeks leading up to times when it opens its doors to the public.
C)highest in the weeks leading up to times when it opens its doors to the public.
D)highest when they close their doors following a holiday season.

Question 52

Which of the following statements is NOT true?A line-of-credit from a commercial bank:

A)generally has a maximum stated amount available to the borrower.
B)generally charges the borrower interest only for the amount actually utilized
C)once granted generally never needs to be renewed.
D)is often an alternative to and/or in addition to another form of lending already provided by the bank.

Question 53

A supplier to your firm offers credit terms of 2/15 net 45 however,your firm never takes advantage of the discount but instead always pays full price on day 45.Your finance intern claims that your firm would be better off borrowing money from an existing but little used line of credit at a current annualized rate of 8%,pay the firm providing credit at the end of the discount period (day 15)and to then repay the line of credit 30 days later on day 45.She argues that the cost to your firm would be lower than current practice.What is the effective cost to the firm of not utilizing the discount vs,the cost of borrowing money to take advantage of the discount? Please show your work and provide your answers in percentage terms.

Question 54

An interesting fact about commerce in America is that we tend to see very few differences in the age of accounts receivable across industries.

Question 55

A major benefit to firms that rely on accounts payable as a source of short-term financing is that it can defer payment of goods and services received.A potential cost is that the firm might be foregoing discounts for early repayment.

Question 56

Which of the following is NOT considered a source of short-term financing?

A)a 10-year bond
B)a banker's acceptance
C)a 90-day bank loan
D)an issue of commercial paper

Question 57

What is LIBOR,how are LIBOR interest rates determined,and for what are they used?

Question 58

The ________ is,in theory,the interest rate offered to a bank's most credit worthy customers.

A)LIBOR
B)prime rate
C)promissory rate
D)bridge rate

Question 59

The operating cash flow cycle compares the combined age of inventory and receivables with the age of payables in order to identify a funding gap.

Question 60

________ is/are the most common form of short-term financing for a small and medium sized firms.

A)Commercial paper
B)Banker's acceptances
C)Short-term bank loans,or promissory notes,
D)New common stock

Question 61

________ is/are a short-term,generally unsecured.corporate IOUs issued by the "most credit-worthy" firms.

A)Repurchase agreements
B)Commercial paper
C)Negotiable CDs
D)Treasury bills

Question 62

Most commercial paper is UNSECURED.

Question 63

For an exporter to lose money after accepting a banker's acceptance,

A)both the importer and the importer's bank would need to default on the agreement.
B)the importer would have to default on the agreement.
C)the exporter would have to default on the agreement.
D)the federal government would need to step into the transaction and declare it to be null and void.

Question 64

Commercial paper would be considered appropriate for funding which types of corporate needs?

A)the purchase of capital equipment with lives of 5 years or longer
B)seasonal needs for a retail firm
C)financing long-term property purchases
D)all of the above

Question 65

Banker's Acceptances are closely affiliated with international transaction rather than domestic ones.Describe and provide an example of how this market works and why there is a need for the instrument.

Question 66

One RISK of a line-of credit is that the borrower is only charged on the amount of the credit that is actually utilized.

Question 67

One important principle that financial managers try to follow is to match short-term sources of funds with long-term uses of funds.

Question 68

________ would be a common source of financing in international trade.

A)Commercial paper
B)Negotiable CDs
C)Treasury bonds
D)Banker's acceptances

Question 69

________ is the process whereby the firm sells receivables to a lender at a discount (say 2 percent)to the actual value of the receivables.Customers then repay the money they owe to the firm directly to the lender instead.

A)Factoring of payables
B)Loan sharking
C)Bridge loaning
D)Factoring of receivables

Question 70

One definition of LIBOR,is that it is the rate at which banks can borrow from one another.

Question 71

Because banker's acceptances are typically through foreign banks they are generally considered to be of high risk.

Question 72

Your author describes an aspect of the 2007-2009 financial crisis concerning commercial paper and a financial instrument he refers to as an ABCP.Define an ABCP and the role it played in the financial crisis.