Question 1

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

Accepted Answer

Cash budget is a forward-looking statement that tracks the cash inflows and outflows of a business over a specific period, allowing managers to identify potential cash shortages or surpluses. It is designed to help businesses manage their cash flow effectively and make informed decisions regarding investments, expenses, and borrowing. The statement of sources and uses of cash and the pro forma balance sheet are also useful financial statements but do not provide the same level of detailed cash flow forecasting as a cash budget. Monthly bank statements are a historical record of transactions and do not provide insight into future cash flow projections.

Question 2

What motivation is provided for managers not to follow the relaxed strategy of long- versus short-term financing?

Accepted Answer

Choosing short-term financing may provide lower interest rates, but the potential income from investing those funds in short-term investments can be unattractive. Managers may be motivated to choose long-term financing to avoid missing out on potentially lucrative investment opportunities. Additionally, continually obtaining financing through transaction costs and dealing with burdensome tax consequences may further incentivize managers to choose long-term financing. However, the answer choice D is not accurate, as long-term financing can actually provide tax benefits.

Question 3

If a firm's current ratio exceeds 1.0,what happens as a result of paying cash to reduce accounts payable?

Accepted Answer

The answer of If a firm's current ratio exceeds 1.0,what...

Question 4

A firm has borrowed $1 million and assigned its receivables to the lender.Because of defaults,the receivables prove insufficient to cover the debt.In this case,the:

Accepted Answer

When a firm borrows money and assigns its receivables to the lender, it is commonly known as factoring. In the event of default, the risk falls on the firm rather than the lender. This is because the firm has sold its receivables to the lender and the lender now owns them. If the receivables are not enough to cover the debt, the firm is still responsible for paying back the remainder.

Question 5

Which of the following would not be included in a cash budget?

Accepted Answer

Depreciation is a non-cash expense and would not be included in a cash budget. The other options, income tax payments, cash receipts, and dividend payments, are all items that affect cash flows and would be included in a cash budget.

Question 6

The time interval between paying for raw materials and collecting on sales of finished goods is known as the:

Accepted Answer

The time interval between paying for raw materials and collecting on sales of finished goods is known as the cash conversion cycle. This cycle measures the amount of time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. The cycle is important for companies to manage effectively as it affects their liquidity and profitability.

Question 7

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? (I.)Current assets increase by $170,000.
(II))Current liabilities decrease by $60,000.

Accepted Answer

The answer of What will be the change in net...

Question 8

Which of the following would act to reduce the carrying costs of inventory?

Accepted Answer

When general interest rates decrease in the economy, it becomes less expensive to finance inventory holding, thereby reducing the carrying cost of inventory. The other options do not necessarily reduce carrying costs. For example, inventory that is capable of spoiling may require extra costs to maintain and dispose of properly, increasing carrying costs. Rapidly going out of style may lead to markdowns and write-downs, which also increase carrying costs.

Question 9

Which of the following would not be considered a use of cash?

Accepted Answer

Depreciation is a non-cash expense that does not require the use of actual cash. A, B, and D all involve changes in cash flow, such as the distribution of cash to shareholders through dividends or the collection of cash from customers through increased accounts receivable.

Question 10

The safety margin kept by the bank on loan against liquid assets is called:

Accepted Answer

The safety margin kept by the bank on loan against liquid assets is called a haircut.

Question 11

If the Statement of Sources and Uses of Cash shows a decrease in cash balance,which of the following changes might have eliminated that decrease?

Accepted Answer

An increase in accounts payable means that the company has more unpaid bills and is effectively borrowing money without decreasing its cash balance. This could offset the decrease shown in the Statement of Sources and Uses of Cash.

The other options (A, C, D) would all further decrease cash balance and exacerbate the issue. Increasing cash dividends paid means that the company is distributing more cash to shareholders, decreasing its available cash. Increasing accounts receivable means that the company is receiving less cash in the short term, as customers owe it money. Increasing inventories means that the company is spending money to purchase more inventory, which decreases its cash balance.

Question 12

When product demand is high,firms following a "middle of the road policy" for long- versus short-term financing will:

Accepted Answer

When product demand is high, firms should borrow short-term because short-term borrowing usually has lower interest rates compared to long-term borrowing. This allows the firm to minimize its interest expenses and maximize its profits. Additionally, holding or selling marketable securities is not as effective as borrowing short-term as they may not provide sufficient funds to meet the high demand for the product.

Question 13

If managers could automatically change each term in the equation of the cash conversion cycle,which of the following would be expected to provide the most benefit?

Accepted Answer

Decreasing the numerator of each term by 10% in the cash conversion cycle equation effectively reduces the amount of time inventory is held, the amount of time it takes to collect receivables, and increases the time to pay off payables. This would speed up the cash conversion cycle, making cash available more quickly and improving the company's liquidity position.

Question 14

When a firm finances long-term assets with short-term sources of funding,it:

Accepted Answer

Financing long-term assets with short-term sources of funding goes against the principle of matched maturities, which suggests that long-term assets should be financed with long-term funding. This increases the risk of cash shortage and can result in higher interest expenses in the long run. Therefore, option D is the best choice as it correctly identifies the principle that is being ignored in this situation.

Question 15

Field warehousing can be an important source of:

Accepted Answer

The answer of Field warehousing can be an important source...

Question 16

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable (due for 90 days.)The net effect of these transactions on the firm's net working capital is:

Accepted Answer

Paying out dividends does not affect net working capital since it involves equity and cash, both of which are not part of working capital calculation. Repaying notes payable reduces both cash and current liabilities, leaving net working capital unchanged. Therefore, the only effect comes from the dividend payout, decreasing net working capital by $700,000.

Question 17

Firms that continually invest in non-trivial amounts of marketable securities may be guilty of:

Accepted Answer

The answer of Firms that continually invest in non-trivial amounts...

Question 18

In "field warehousing" the inventory is kept by the:

Accepted Answer

In field warehousing, the inventory is kept by an independent warehousing company. This company is neither owned by the borrower nor the lender but is hired by either of them to store the inventory. The lender often pays for the warehousing services.

Question 19

As for the preparation of cash budgets,capital expenditures are:

Accepted Answer

Capital expenditures are major investments that require large amounts of cash and are not included in the operating budget. Instead, they are included in the capital budget and are considered to be uses of cash. They make the budget lumpy because they are infrequent and often result in large outflows of cash.

Question 20

Ignoring the risk of theft,cash balances cannot spoil,yet managers are concerned with carrying costs.Why?

Accepted Answer

Carrying costs refer to the costs associated with holding inventory or cash balances. Even though cash balances cannot spoil, they still have carrying costs because they are idle and not generating any return. This means that there is an opportunity cost associated with holding cash balances, as those funds could be invested in more productive assets. Therefore, managers are concerned with carrying costs and strive to minimize the amount of idle cash on hand. Options A, B, and D are not directly related to the question of carrying costs.

Quiz 20: Short-Term Financial Planning