Question 1

Which one of the following activities is most apt to reduce the inventory period?

Accepted Answer

Replacing slow-moving items with faster-selling products will increase the rate at which inventory is sold, thereby reducing the inventory period.

Question 2

Which one of the following statements is true,all else constant?

Accepted Answer

An increase in the inventory turnover rate will decrease the cash cycle because it indicates that the company is selling its inventory more quickly, which results in receiving cash earlier in the process. Choices A, B, and E are incorrect because they describe actions that increase the cash cycle instead of decreasing it. Choice C is incorrect because the cash cycle can be negative if the company can generate cash from its operating cycle faster than it needs to pay its obligations.

Question 3

Which one of the following statements about the operating cycle is correct?

Accepted Answer

The operating cycle describes how a product moves through the current asset accounts, from inventory to accounts receivable to cash. It begins with the purchase of inventory and ends when payment is received from customers.

Question 4

A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will?
I.uncollectable accounts receivable
II.work stoppages for lack of raw materials
III.carrying costs
IV.obsolete or out-of-date inventory

Accepted Answer

A flexible short-term financial policy would allow for more uncollectable accounts receivable, carrying costs, and obsolete inventory as the policy is not as restrictive in terms of credit and inventory management. With more flexibility, the company may take on more risk in extending credit to customers and holding onto inventory for longer periods. Work stoppages for lack of raw materials may not necessarily be affected by the financial policy, as it is more related to supply chain management and production planning.

Question 5

Tri-City Grocers is a chain of grocery stores that just hired a new CFO.Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm?
I.easing the credit terms given to customers
II.increasing the amount of inventory carried by each grocery store
III.borrowing funds to keep more cash available for store operations
IV.decreasing the firms' investments in marketable securities

Accepted Answer

The answer of Tri-City Grocers is a chain of grocery...

Question 6

Which of the following costs tend to rise when a firm switches to a flexible financial policy from a restrictive financial policy?
I.restocking costs
II.lower prices to offset limited selection
III.storage costs
IV.current asset opportunity costs

Accepted Answer

When a firm switches to a flexible financial policy, it tends to hold more current assets, leading to increased storage costs and higher opportunity costs of holding these assets.

Question 7

All else held constant,which one of the following statements is correct concerning the accounts payable period?

Accepted Answer

An increase in the accounts payable period means the company takes longer to pay its suppliers, which effectively reduces the cash cycle by delaying cash outflows.

Question 8

Which one of the following statements related to the inventory period is correct?

Accepted Answer

The inventory period is the average number of days a firm holds inventory on its shelves. It is calculated by dividing the average inventory by the cost of goods sold and multiplying by 365 days. A higher inventory turnover rate would decrease the inventory period, not increase it. The length of the cash cycle includes the inventory period, but it is not solely determined by it. The inventory period is not equal to the operating cycle minus the accounts payable period; it is simply a component of the operating cycle. The inventory period can affect the cash cycle if inventory is held for extended periods, tying up funds that could be used for other business purposes.

Question 9

The cash cycle is equal to which one of the following?

Accepted Answer

The cash cycle is calculated as the inventory period plus the accounts receivable period minus the accounts payable period. This reflects the time between when a company pays for its inventory and when it receives cash from sales.

Question 10

Which one of the following actions is indicative of a restrictive short-term financial policy?

Accepted Answer

Minimizing the cash balances held by the firm indicates a restrictive short-term financial policy as it limits the amount of available cash for immediate expenses and emergencies.

Question 11

Which one of the following industries is most apt to have the shortest operating cycle?

Accepted Answer

Local restaurants typically have a very short operating cycle, as they purchase ingredients frequently and have a high turnover rate of products. They may also have daily specials that require frequent inventory turnover. Compare this to a car manufacturer, which may take months to produce a single car and sell it.

Question 12

Suppose that Martin Metal Products changes its policy and starts requiring all of its customers to pay within 20 days rather than the 30 days that it currently allows.Which one of the following will result from this change?

Accepted Answer

Requiring customers to pay sooner will decrease the receivables period, which in turn decreases the cash cycle.

Question 13

Which one of the following can occur if the operating cycle decreases while both the accounts receivable and the accounts payable periods remain constant?

Accepted Answer

The answer of Which one of the following can occur...

Question 14

Which of the following costs will tend to increase if a firm switches to a restrictive short-term financial policy from a flexible short-term policy?
I.lost sales due to out-of-stock items
II.inventory warehousing costs
III.cash-outs
IV.total annual order costs

Accepted Answer

A restrictive short-term financial policy typically involves holding lower levels of inventory and cash, which can lead to increased lost sales due to out-of-stock items (I) and higher total annual order costs (IV) due to more frequent ordering. Cash-outs (III) may also increase as less cash is held on hand. Inventory warehousing costs (II) would likely decrease, not increase, as less inventory is held.

Question 15

All else constant,which one of the following will decrease the cash cycle?

Accepted Answer

Decreasing the credit period granted to a customer means that the company is receiving cash from customers earlier, which will decrease the accounts receivable period. This, in turn, will decrease the cash cycle. Therefore, A is the best choice as it directly affects the time it takes for the company to receive cash from customers. The other options, including decreasing the inventory turnover rate, decreasing the accounts payable period, decreasing the accounts receivable turnover rate, and increasing the receivables period will all increase the cash cycle.

Question 16

Which one of the following statements is correct?

Accepted Answer

A firm would prefer a negative cash cycle because it means the firm is receiving cash from sales before it needs to pay its suppliers, improving liquidity and reducing the need for external financing.

Question 17

Which one of the following is most apt to decrease the accounts receivable period?

Accepted Answer

By increasing the discount for cash payment, customers are incentivized to pay faster, which would decrease the accounts receivable period.

Question 18

Which one of the following is most indicative of a flexible short-term financial policy?

Accepted Answer

A flexible short-term financial policy is characterized by maintaining a high level of current assets relative to sales, which ensures liquidity and the ability to meet short-term obligations.

Question 19

Which one of the following firms is most apt to have the shortest inventory period?

Accepted Answer

A delicatessen typically has a very short inventory period as they sell fresh items and need to replenish their stock frequently to maintain the quality of their products.

Question 20

An increase in the accounts receivable period will do which one of the following?

Accepted Answer

An increase in the accounts receivable period means that it takes longer to collect money from customers, which increases the time it takes for cash to come in. This, in turn, lengthens the cash cycle.

Quiz 16: Short-Term Financial Planning