Question 1

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Accepted Answer

Some companies may use asset-based lending, meaning they borrow money by using their current assets as collateral. Others may sell their assets as a means of financing.

Question 2

How high can accounts receivable be allowed to grow before the firm's receivables period exceeds 50 days if annual sales equal $5 million and the cash conversion cycle equals 75 days?

Accepted Answer

To calculate the maximum allowable accounts receivable, we first need to calculate the average daily sales, which is $5 million divided by 365, or $13,698.63 per day.

Next, we need to calculate the maximum allowable accounts receivable before the receivables period exceeds 50 days. To do this, we multiply the average daily sales by 50 days:

$13,698.63 x 50 = $684,932.50

Therefore, the maximum allowable accounts receivable is $684,932. To ensure the receivables period does not exceed 50 days, the firm should aim to keep its accounts receivable balance below this amount.

Question 3

Determine the value of Accounts Payable given the following information: $$\begin{array} { | l | c | } 
\hline { \text { Data: } } & \
\hline \text { Average Irveritory } & 3,000.00 \
\hline \text { Average AR } & 5,000.00 \
\hline \text { Average AP } & ? \
\hline \text { sales } & 40,000.00 \
\hline \text { COGs } & 30,000.00 \
\hline \text { Cash Corversion Cycle } & 64.48 \
\hline \text { Irventory Period } & 36.50 \
\hline \text { Receivable Period } & 45.63 \
\hline
\end{array}$$

Accepted Answer

The answer of Determine the value of Accounts Payable given...

Question 4

What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000 higher than ending, and $20,000 was collected?

Accepted Answer

The answer of What was the sales volume in the...

Question 5

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

Accepted Answer

The annual cost of goods for the firm can be calculated using the formula: Annual Cost of Goods = (Average Accounts Payable / Accounts Payable Period) * 365. Plugging in the values: ($600,000 / 35) * 365 = $6,257,143.

Question 6

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

Accepted Answer

This is correct. When a loan is secured by receivables, the bank has a claim on the firm's accounts receivable. If the firm defaults on the loan, the bank can collect the receivables from the customers and use the cash to pay off the debt.

Question 7

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
Find the net change in cash conversion cycle.

Accepted Answer

The cash conversion cycle is calculated as the inventory period plus the receivables period minus the accounts payable period. An increase in the inventory period (I) by 12 days increases the cycle, a decrease in the receivables period (II) by 6 days decreases the cycle, and an increase in the accounts payable period (III) by 4 days decreases the cycle. The net change is +12 - 6 - 4 = +2 days.

Question 8

With a line of credit, a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit.

Accepted Answer

A line of credit is a flexible type of loan that allows the borrower to borrow as much or as little as they need up to a specified credit limit. The borrower can then repay the loan and borrow again as long as they do not exceed the credit limit. This gives the borrower more control and flexibility over their borrowing, compared to a traditional loan where the borrower receives a lump sum and must make regular payments on a fixed schedule.

Question 9

Calculate the change in cash given the following information: $$\begin{array} {| l | r| } 
\hline \text { Increase in AR } & 5,000 \
\hline \text { Decrease in Inventory } & 25,000 \
\hline \text { Decrease in Accounts Payable } & 10,000 \
\hline \text { Increase in Taxes Payable } & 2,500 \
\hline \text { Issued Long Term Debt } & 300,000 \
\hline \text { Issued Common Shares } & 250,000 \
\hline \text { Issued Dividends } & 60,000 \
\hline
\end{array}$$

Accepted Answer

The change in cash is calculated by considering the effects of changes in working capital, financing, and investing activities. Increase in AR (accounts receivable) decreases cash (-5,000), decrease in inventory increases cash (+25,000), decrease in accounts payable decreases cash (-10,000), increase in taxes payable increases cash (+2,500), issuing long-term debt increases cash (+300,000), issuing common shares increases cash (+250,000), and issuing dividends decreases cash (-60,000). Adding these together: -5,000 + 25,000 - 10,000 + 2,500 + 300,000 + 250,000 - 60,000 = $502,500.

Question 10

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.The risk of default on the receivables is now borne by the bank.

Accepted Answer

When a loan is secured by receivables, the firm does assign the receivables to the bank as collateral, but the risk of default on the receivables remains with the firm, not the bank. The bank can collect the receivables if the firm fails to repay the loan, but any shortfall due to defaults on those receivables would still be the firm's responsibility.

Question 11

Calculate the value of Accounts Receivable, given the following information: $$\begin{array} { | l | c | } 
\hline \text { Data: } & \
\hline \text { Average Inventory } & 7,000.00 \
\hline \text { Average AR } & ? \
\hline \text { Average AP } & 3,500.00 \
\hline \text { Sales } & 120,000.00 \
\hline \text { COGS } & 95,000.00 \
\hline \text { Cash Conversion Cycle } & 51.47 \
\hline \text { Inventory Period } & 26.89 \
\hline \text { Payables Period } & 13.45 \
\hline
\end{array}$$

Accepted Answer

The Accounts Receivable Period can be calculated using the Cash Conversion Cycle formula: CCC = Inventory Period + Receivables Period - Payables Period. Solving for Receivables Period gives 51.47 = 26.89 + Receivables Period - 13.45, which results in a Receivables Period of 38.03 days. Using the formula for Receivables Turnover Ratio (Sales / Average AR) and solving for Average AR gives $12,500.

Question 12

Calculate the effective rate of 12% compounded quarterly.

Accepted Answer

To find the effective rate, we use the formula: 
(1 + i/n)^n - 1
where i is the nominal rate (12%) and n is the number of times the interest is compounded per year (4, since it is compounded quarterly).

(1 + 0.12/4)^4 - 1 = 0.1255 or 12.55% (rounded to two decimal places)

Therefore, the best choice is B.

Question 13

The cost of issuing commercial paper is generally lower than that of a line of credit.

Accepted Answer

Commercial paper is a type of short-term debt that companies issue to raise funds quickly. It typically has a lower interest rate compared to a line of credit because commercial paper is considered less risky than a traditional loan. Additionally, there are no origination fees or collateral requirements associated with commercial paper, further reducing the cost compared to a line of credit.

Question 14

The following information is for the month of January. $$\begin{array} { | l | l | c | } 
\hline \text { (I.) } & \text { Beginning accounts receivable } & = \$ 40 \text { million } \
\hline \text { (II) } & \text { Sales for January } & = \$ 160 \text { million } \
\hline \text { (III) } & \text { Collection for January } & = \$ 145 \text { million } \
\hline
\end{array}$$ Find the ending accounts receivable for January.

Accepted Answer

Ending accounts receivable is calculated by adding the beginning accounts receivable to the sales for the month and then subtracting the collections for the month. Therefore, ending accounts receivable = $40 million + $160 million - $145 million = $55 million.

Question 15

Once the firm has sold its receivables, the non-recourse factors bear all the responsibility for collecting on the account.

Accepted Answer

Non-recourse factoring means that the factor assumes the risk of customer non-payment and is responsible for collecting on the account. Therefore, once a firm has sold its receivables through non-recourse factoring, the factor is solely responsible for collecting the payment and the firm bears no further responsibility for the account.

Question 16

The factoring firm, under the terms recourse, bears responsibility for default on accounts receivable purchased from a firm.

Accepted Answer

Under the terms of recourse factoring, the factoring company assumes responsibility for default on accounts receivable purchased from a firm.

Question 17

Field warehousing is a system of protecting the borrower against spoiled or stolen inventory.

Accepted Answer

Field warehousing is a system where a third-party warehouse company stores goods as collateral for a loan, ensuring the lender has a secured interest in the inventory, rather than protecting the borrower against spoiled or stolen inventory.

Question 18

Calculate the Cash Conversion and Operating cycle, given the following information: $$\begin{array} { | l | c | } 
\hline \text { Data: } & \
\hline \text { Average Inventory } & 1,500.00 \
\hline \text { Average AR } & 2,500.00 \
\hline \text { Average AP } & 650.00 \
\hline \text { sales } & 12,000.00 \
\hline \text { COGB } & 9,500.00 \
\hline
\end{array}$$

Accepted Answer

The Operating Cycle is calculated as (Average Inventory / COGS) * 365 + (Average AR / Sales) * 365 = (1500/9500)*365 + (2500/12000)*365 = 57.63 + 76.04 = 133.67 days. The Cash Conversion Cycle is Operating Cycle - (Average AP / COGS) * 365 = 133.67 - (650/9500)*365 = 109.67 days. Rounded, these are 109 days and 134 days.

Question 19

Calculate the cash balance given the following information: $$\begin{array} {| l | r | } 
\hline \text { Decrease in AR } & 30,000 \
\hline \text { Increase in Inventory } & 70,000 \
\hline \text { Increase in Accounts Payable } & 45,000 \
\hline \text { Decrease in Taxes Payable } & 8,000 \
\hline \text { Repaid Long Term Debt } & 90,000 \
\hline \text { Issued Common Shares } & 160,000 \
\hline \text { Issued Dividends } & 25,000 \
\hline
\end{array}$$

Accepted Answer

To calculate the cash balance, consider the impact of each item on cash flow: - Decrease in Accounts Receivable (AR) increases cash by $30,000. - Increase in Inventory decreases cash by $70,000. - Increase in Accounts Payable increases cash by $45,000. - Decrease in Taxes Payable decreases cash by $8,000. - Repaying Long Term Debt decreases cash by $90,000. - Issuing Common Shares increases cash by $160,000. - Issuing Dividends decreases cash by $25,000. Adding these impacts together: $30,000 - $70,000 + $45,000 - $8,000 - $90,000 + $160,000 - $25,000 = $42,000.

Question 20

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

The firm's total credit sales for the first two quarters is $50 million + $60 million = $110 million.

80% of the first quarter's receivables, which is $50 million x 80% = $40 million, will be collected in the second quarter.

80% of the second quarter's receivables, which is $60 million x 80% = $48 million, will be collected in the third quarter.

Therefore, the total collection for the firm in the second quarter will be $40 million + $48 million = $88 million.

The correct answer choice is B, $58 million. However, none of the answer choices are correct based on the given information.

Quiz 20: Short-Term Financial Planning