Question 1

Given the following assets; 
I. Long-term assets
II. Inventories
III. Receivables
IV. Marketable securities
Arrange the above assets in the order of liquidity. (The most liquid being first)

Accepted Answer

Marketable securities are the most liquid assets, followed by receivables, inventories and then long-term assets, which are the least liquid. Therefore, the order of liquidity is IV, III, II, and I.

Question 2

Cumulative capital requirement can be met by: 
I. long-term financing
II. short-term financing

Accepted Answer

C

Question 3

The cash cycle is represented by the following sequence:

Accepted Answer

A

Question 4

The following is the general formula for calculating the "Ending accounts receivable (AR):"

Accepted Answer

The formula for calculating the ending accounts receivable (AR) is to add the beginning AR balance to the sales made on credit during the period and then to subtract the collections received from customers during the period. Therefore, the correct formula is: Ending (AR) = beginning (AR) + sales - collections.

Question 5

According to Strategy C, a firm would:

Accepted Answer

The answer of According to Strategy C, a firm would:
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Question 6

Cash inflow in cash budgeting comes mainly from:

Accepted Answer

Cash inflows in cash budgeting mainly come from collection of accounts receivable, as customers paying their outstanding balances would increase the cash balance of the company. Short-term debt and issue of securities would result in a cash inflow at the time of borrowing, but they also come with associated interest expenses and repayment obligations that could decrease the cash balance in future periods. Therefore, A is the best choice. D is incorrect because accounts receivable are a source of cash inflow.

Question 7

Given the following assets; 
I. Long-term assets
II. Inventories
III. Receivables
IV. Marketable securities
Which is the least liquid of these assets?

Accepted Answer

Long-term assets are the least liquid because they cannot be easily converted into cash without significant time and effort. In contrast, inventories, receivables, and marketable securities can be sold more quickly for cash.

Question 8

The first step in the preparation of cash budget is:

Accepted Answer

The first step in preparing a cash budget is to forecast sales, as this will determine the amount of cash inflows expected for the period. Only after the sales forecast has been determined can estimations for cash inflows and outflows be made. The sources and uses of funds statement may be used later in the budgeting process, but it is not the first step.

Question 9

Net working capital is defined as:

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. It represents the amount of available capital that a business has to meet its day-to-day operating expenses. The higher the net working capital, the better a business is able to meet its financial obligations. Option A is incorrect because it doesn't consider the liabilities, Option C is incorrect because it refers to short-term cash flows only, and Option D is incorrect because it includes both short-term and long-term assets and liabilities.

Question 10

Short-term financial decisions:
I. involve short lived assets
II. involve short lived liabilities
III. are easily reversed

Accepted Answer

Short-term financial decisions involve both short lived assets and short lived liabilities, as well as the ability to easily reverse the decisions. Therefore, all three choices - I, II, and III - are correct.

Question 11

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $90; February, $20; March, $30. 70% of sales are usually paid for in the month that they take place and 30% in the following month. Receivables at the end of December were $20 million. What are the forecasted collections on accounts receivable in March?

Accepted Answer

The answer of A company has forecast sales in the...

Question 12

The cash budget is the primary short-term financial planning tool. The key reasons a cash budget is created are:
I. To estimate your investment in assets
II. To estimate the size and timing of your new cash flows
III. To prepare for potential financing needs

Accepted Answer

The cash budget is primarily used to estimate the size and timing of new cash flows and to prepare for potential financing needs. It is not used to estimate investment in assets, which is typically done through a capital budget. Therefore, choices II and III are the main reasons for creating a cash budget.

Question 13

According to Strategy A, a firm should:

Accepted Answer

The answer of According to Strategy A, a firm should:
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Question 14

Cash budget may be prepared on a

Accepted Answer

A cash budget can be prepared on a monthly, weekly, or even a daily basis, depending on the needs of the organization. Monthly budgets are useful for long-term planning and goal setting, while weekly or daily budgets are better for short-term cash management and monitoring. Therefore, all of the above options are suitable for preparing a cash budget.

Question 15

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in the month that they take place, 20% in the following month, and the final 10% in the next month. Receivables at the end of December were $23 million. What are the forecasted collections on accounts receivable in March?

Accepted Answer

To solve the problem, we need to calculate the sales that will be collected in March.

For January sales: 
- 70% will be collected in January: $80 million x 70% = $56 million 
- 20% will be collected in February: $80 million x 20% = $16 million 
- 10% will be collected in March: $80 million x 10% = $8 million

For February sales: 
- 70% will be collected in February: $60 million x 70% = $42 million 
- 20% will be collected in March: $60 million x 20% = $12 million 
- 10% will be collected in April: $60 million x 10% = $6 million

For March sales: 
- 70% will be collected in March: $40 million x 70% = $28 million 
- 20% will be collected in April: $40 million x 20% = $8 million 
- 10% will be collected in May: $40 million x 10% = $4 million

Total collections in March: $8 million (from January sales) + $12 million (from February sales) + $28 million (from March sales) = $48 million

Therefore the answer is D) $48 million.

Question 16

The main difference between short-term and long-term finance is:

Accepted Answer

Short-term finance refers to financing options with a maturity period of up to one year, while long-term finance refers to financing options with a maturity exceeding one year. Thus, the main difference between short-term and long-term finance is the timing of cash flows. While the risks and present value of cash flows may differ between short-term and long-term finance, these factors are not unique to either type of financing option.

Question 17

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $200; February, $140; March, $100. 50% of sales are usually paid for in the month that they take place, 30% in the following month, and the final 20% in the next month. Receivables at the end of December were $100 million. What are the forecasted collections on accounts receivable in March?

Accepted Answer

To calculate the forecasted collections on accounts receivable in March, we need to first calculate what percentage of the total sales of January, February, and March will be collected in March.

For January sales: 50% will be collected in January, 30% in February, and 20% in March. Therefore, 20% of $200 million will be collected in March, which is $40 million.

For February sales: 50% will be collected in February, 30% in March, and 20% in April. Therefore, 30% of $140 million will be collected in March, which is $42 million.

For March sales: 50% will be collected in March, 30% in April, and 20% in May. Therefore, 50% of $100 million will be collected in March, which is $50 million.

Total forecasted collections in March = $40 million + $42 million + $50 million = $132 million.

Therefore, the answer is choice A) $132 million.

Question 18

A company has forecast sales in the first 3 months of the year as follows (figures in millions): January, $60; February, $80; March, $100. 60% of sales are usually paid for in the month that they take place and 40% in the following month. Receivables at the end of December were $24 million. What are the forecasted collections on accounts receivable in March?

Accepted Answer

To calculate the forecasted collections on accounts receivable in March, we need to calculate the total amount of sales made in January, February, and March and then apply the 60-40 rule to each month's sales to determine how much of each month's sales will be collected in each month.

Sales in January = $60 million
Sales in February = $80 million
Sales in March = $100 million

For January sales, 60% or $36 million will be collected in January and 40% or $24 million in February. For February sales, 60% or $48 million will be collected in February and 40% or $32 million in March. And for March sales, 60% or $60 million will be collected in March and 40% or $40 million in April.

Now, we need to add up the amounts collected in March from January, February, and March sales:

Amount collected from January sales = 40% of $60 million = $24 million
Amount collected from February sales = 40% of $80 million = $32 million
Amount collected from March sales = 60% of $100 million = $60 million

Total amount collected in March = $24 million + $32 million + $60 million = $116 million

However, we need to subtract the amount of accounts receivable at the end of December ($24 million) to get the net amount collected in March:

Net amount collected in March = $116 million - $24 million = $92 million

Therefore, the answer is B) $92 million.

Question 19

According to Strategy B, a firm would:

Accepted Answer

The answer of According to Strategy B, a firm would:
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Question 20

Given the following data: Total current assets = $852; Total current liabilities = $406; Long-term debt = $442, calculate the net working capital.

Accepted Answer

Net working capital = Total current assets - Total current liabilities
Net working capital = $852 - $406
Net working capital = $446

Quiz 19: Financial Planning

Given the following assets; I. Long-term assets II. Inventories III. Receivables IV. Marketable securities Arrange the above assets in the order of liquidity. (The most liquid being first)

Cumulative capital requirement can be met by: I. long-term financing II. short-term financing