Question 1

All else the same, which of the following would decrease the length of the cash cycle?

Accepted Answer

The answer of All else the same, which of the...

Question 2

A Vancouver firm has a cash balance of $12,000 as of June 1. During the month they paid $16,000 on account, $13,000 for wages, and $1,000 for other expense items. The company maintains a minimum cash balance of $10,000. Sales for the firm for April, May, and June are $15,000, $22,000, and $18,750, respectively. The company collects 40% of sales in the month of sale, 50% in the following month, and 10% in the second month following the month of sale. What is the cash surplus or deficit as of June 30?

Accepted Answer

The firm starts with $12,000. They pay out $16,000 + $13,000 + $1,000 = $30,000. Cash collected in June is 40% of June sales ($18,750) + 50% of May sales ($22,000) + 10% of April sales ($15,000), which totals $7,500 + $11,000 + $1,500 = $20,000. The net cash flow is $12,000 + $20,000 - $30,000 = $2,000. Since the minimum cash balance is $10,000, the deficit is $10,000 - $2,000 = $8,000.

Question 3

Which of the following statements is true?

Accepted Answer

The length of the operating cycle, which includes both the inventory period and the accounts receivable period, is always greater than or equal to the length of the cash cycle because the cash cycle also accounts for the accounts payable period, effectively shortening the time between cash outlay for inventory and cash receipt from sales.

Question 4

Which one of the following is a source of cash?

Accepted Answer

Purchasing goods from a supplier on credit increases accounts payable, which is a liability, and does not immediately use cash, thus it is considered a source of cash.

Question 5

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

Accepted Answer

Delaying payment to suppliers by an additional ten days means you are retaining cash longer, which can reduce the immediate need for bank financing since you have more cash on hand to cover other operational costs.

Question 6

Martinque and Son has 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.

Accepted Answer

The answer of Martinque and Son has a 60 day...

Question 7

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:

Accepted Answer

The firm has the least sales in the first quarter, and with a 90-day collection period, it will collect cash from these sales in the second quarter. Since production costs are steady, the firm is most likely to face a cash-out situation in the second quarter when cash inflows are low.

Question 8

The financing of short-term assets with short-term debt is known as:

Accepted Answer

Maturity hedging involves matching the maturities of assets and liabilities to reduce risk, which in this context means financing short-term assets with short-term debt.

Question 9

Which one of the following sentences is correct about a manufacturing firm with seasonal sales?

Accepted Answer

Fixed expenses, such as rent, salaries, and insurance, do not typically fluctuate with sales volume, so they tend to remain relatively stable from one quarter to the next, even in businesses with seasonal sales patterns.

Question 10

A floor plan can also be called a(n):

Accepted Answer

A floor plan is a type of secured inventory loan where the loan is specifically tied to the inventory of the borrower. This means the inventory itself serves as collateral for the loan.

Question 11

The cash cycle is defined as the period of time between the _____ and the _____.

Accepted Answer

The answer of The cash cycle is defined as the...

Question 12

Which one of the following will decrease the operating cycle?

Accepted Answer

Increasing the inventory turnover from 9 to 10 means that the company is selling and replacing its inventory more quickly, which decreases the operating cycle.

Question 13

If a firm maintains a relatively high level of investments in cash and marketable securities, which of the following statements is true?

Accepted Answer

Maintaining high levels of cash and marketable securities typically adds little to shareholder wealth as these assets generally yield lower returns compared to other investments.

Question 14

Krista's sells $4,000 worth of goods in December, $2,800 worth in January, $3,200 in February and $3,500 in March. The wholesale cost is 65% of the retail price. The firm has a receivables period of 30 days, a payables period of 60 days, and buys inventory one month prior to selling it. Which one of the following statements is correct?

Accepted Answer

The answer of Krista's sells $4,000 worth of goods in...

Question 15

KNF, Inc. pays its creditors in 45 days. Inventory is purchased one quarter prior to its sale. Cost of goods sold is equal to 50% of the selling price. Each quarter the total that KNF must pay on its accounts is equal to:

Accepted Answer

The answer of KNF, Inc. pays its creditors in 45...

Question 16

Pedro's Farms has $137,000 in net working capital. Which one of the following actions will increase that amount?

Accepted Answer

The answer of Pedro's Farms has $137,000 in net working...

Question 17

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:

Accepted Answer

Switching to a production model where goods are only manufactured upon receiving an actual order reduces the time products spend in inventory before being sold, thereby decreasing the cash cycle. This approach minimizes the gap between paying for production inputs and receiving payment from customers.

Question 18

The Dawson Brothers have a 60 day collection period. Sales for the next calendar year are estimated at $1,800, $1,300, $2,200 and $2,000, respectively, by quarter starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days.

Accepted Answer

The accounts receivable balance at the beginning of Quarter 4 can be calculated by considering the sales that occurred 60 days prior. Since a year has 360 days and each quarter has 90 days, the sales from the last 60 days of Quarter 3 will be collected in Quarter 4. The sales in Quarter 3 are $2,200, and since the collection period is 60 days, two-thirds of Quarter 3's sales will be collected in Quarter 4, which is $2,200 * (60/90) = $1,466.67.

Question 19

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

Accepted Answer

The answer of Which one of the following will increase...

Question 20

Holidays, Etc. produces and distributes seasonal merchandise to retail outlets. The firm has adopted a compromise short-term financial policy. Given this information, which one of the following statements must be true?

Accepted Answer

A compromise short-term financial policy typically involves a mix of internal financing (such as retained earnings) and external financing (such as short-term borrowing) to meet the firm's needs. This approach allows a company to adapt to varying financial requirements and opportunities, such as investing surplus funds in marketable securities when available and borrowing when necessary.

Quiz 18: Short-Term Finance and Planning