Question 1

Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound?
I.fixed expenses
II.fixed asset purchases
III.flexible financing policy
IV.highly seasonal sales

Accepted Answer

Fixed asset purchases require a large amount of cash upfront, which can cause a cash-out for a financially sound firm. Highly seasonal sales can also lead to a cash-out as there may be periods of low or no income followed by large spikes in revenue. Fixed expenses and a flexible financing policy do not necessarily cause a cash-out on their own.

Question 2

The optimal investment in current assets for an operating firm occurs at the point where:

Accepted Answer

The optimal investment in current assets occurs when the total costs of holding current assets is minimized, which means that both carrying costs and shortage costs are taken into consideration. When carrying costs are high, carrying too much current assets would result in a greater cost than the cost of a shortage, while not carrying enough current assets would result in a shortage cost. Therefore, the best choice is to minimize the total costs of holding current assets.

Question 3

Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in products related to water sports.The firm purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date.Sales are highest during July and August.Currently,Jill is preparing the cash disbursements section of the firm's cash budget.Which one of the following statements is supported by this information?

Accepted Answer

Since the firm purchases inventory one month before sales peak and pays for these purchases 60 days after the invoice date, the highest payments to suppliers will occur two months after the inventory is purchased. Given that sales are highest in July and August, inventory for these sales is likely purchased in June and July, leading to the highest payments to suppliers in August and September.

Question 4

A national firm has sales of $729,000 and cost of goods sold of $478,000.At the beginning of the year,the inventory was $37,000.At the end of the year,the inventory balance was $41,000.What is the inventory turnover rate?

Accepted Answer

Inventory turnover = $478,000/[($37,000 + $41,000)/2] = 12.26 times

Question 5

A flexible short-term financial policy:
I.increases shortage costs due to frequent cash-outs.
II.tends to increase sales as compared to a restrictive policy.
III.requires a sizeable investment in current assets.
IV.incurs more carrying costs than a restrictive policy.

Accepted Answer

A flexible short-term financial policy typically involves maintaining a higher level of current assets to meet short-term obligations, which can support sales by ensuring that the company can meet customer demand. This approach incurs more carrying costs due to the larger investment in current assets, contrasting with a restrictive policy that aims to minimize holdings in current assets to reduce costs.

Question 6

A compensating balance:
I.is required when a firm acquires any bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.may be required even if a firm never borrows funds.
IV.is often used as a means of paying for banking services received.

Accepted Answer

A compensating balance increases the effective cost of borrowing because it requires the borrower to keep a non-interest-bearing account balance, which effectively reduces the amount of loanable funds. It can be required even if a firm never borrows, as part of a banking relationship. Additionally, it is often used as a means of paying for banking services, making options II, III, and IV correct.

Question 7

Shortage costs include which of the following?
I.disruption of production schedules
II.inventory ordering costs
III.lost customer goodwill
IV.brokerage costs

Accepted Answer

The answer of Shortage costs include which of the following?
I.disruption...

Question 8

Which of the following are benefits derived from short-term financial planning?
I.having advance notice of when your firm will require external financing
II.being able to determine the extent of time for which a loan is required
III.having the ability to time capital expenditures in order to place the least financial burden possible on a firm
IV.knowing for certain what your cash balance will be six months in advance

Accepted Answer

Short-term financial planning helps in forecasting the need for external financing, determining the duration for which a loan is needed, and timing capital expenditures to minimize financial strain. However, it does not guarantee knowing the exact cash balance in advance due to the inherent uncertainties in business operations.

Question 9

The most common means of financing a temporary cash deficit is a:

Accepted Answer

A temporary cash deficit is a short-term problem that can be addressed by obtaining short-term financing, which is why the best choice would be a short-term unsecured bank loan (Option E). A long-term secured bank loan (Option A) or a long-term unsecured bank loan (Option D) would be more appropriate for addressing long-term financial needs, while a short-term secured bank loan (Option B) or a short-term issue of corporate bonds (Option C) would be more appropriate for long-term financing or larger capital projects.

Question 10

High Point Hotel (HPH)has $165,000 in accounts receivable.To finance a major purchase,the company assigns these receivables to Cross Town Bank.Which one of the following statements correctly describes this transaction?

Accepted Answer

The answer of High Point Hotel (HPH)has $165,000 in accounts...

Question 11

A cumulative cash deficit indicates a firm:

Accepted Answer

A cumulative cash deficit indicates that a firm is spending more cash than it is generating over a period of time. This implies that the firm has a short-term need for external funding, as it may not have enough cash to cover its expenses or debts in the immediate future.

Question 12

Which one of the following statements is correct?

Accepted Answer

This statement is true as long-term interest rates are generally less affected by short-term fluctuations in the economy and monetary policy compared to short-term rates. Options A and B are incorrect as seasonal needs may be financed internally or externally and a flexible financing policy does not necessarily increase the risk of financial distress. Option D is also incorrect as inventory is typically financed with short-term debt. Option E is false as short-term rates are generally lower than long-term rates.

Question 13

Which one of the following statements is correct?

Accepted Answer

A firm with a flexible financing policy often maintains a higher level of liquidity, which includes investing in marketable securities to ensure funds are available for unexpected needs or opportunities.

Question 14

Assume each month has 30 days and a firm has a 60-day accounts receivable period.During the second calendar quarter of the year,that firm will collect payment for the sales it made during which of the following months?

Accepted Answer

The answer of Assume each month has 30 days and...

Question 15

Which one of the following statements is correct concerning the cash balance of a firm?

Accepted Answer

A cumulative cash deficit indicates that a firm is spending more cash than it is receiving, which creates a borrowing need to cover the shortfall. A firm would not attempt to maintain a zero cash balance as it would not have any cash available for unexpected expenses or investment opportunities. The cumulative cash surplus on a cash budget is not equal to the ending cash balance plus the minimum desired cash balance because the minimum desired cash balance is the lowest amount of cash a firm wants to hold for a specific period, while the cumulative cash surplus is the difference between cash receipts and cash disbursements over the same period. The cash balance report uses the ending cash balance as the beginning balance for the next period, not the cumulative cash surplus. The ending cash balance does not have to equal the minimum desired cash balance as the firm may choose to hold more or less cash depending on its specific needs.

Question 16

The primary difference between a line of credit and a revolving credit arrangement is the:

Accepted Answer

The answer of The primary difference between a line of...

Question 17

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 fourth 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 answer of A manufacturing firm has a 90-day collection...

Question 18

Which one of the following statements is correct?

Accepted Answer

Lines of credit often require a cleanup period, which is a time period during which the borrower must pay off the entire outstanding balance on the line. This is typically required once a year, and is intended to ensure that the borrower is using the line of credit for short-term financing needs rather than long-term debt. The other statements in the options are incorrect:

A) The assignment of receivables involves selling the firm's accounts receivables at a discount, not full price.
C) With maturity factoring, the borrower receives the loan amount at a later date, not immediately.
D) Commercial paper can be offered by banks, but it is typically offered by corporations themselves in order to raise short-term funds at a lower interest rate than is available through bank loans.
E) Credit card receivables funding can be relatively expensive due to the high interest rates associated with credit card balances.

Question 19

The Harvester collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:

Accepted Answer

According to the given information, during the month of April, the Harvester collects 60 percent of sales in the month following the month of sale, which means they will collect 60 percent of March sales.

Question 20

Denver Interiors,Inc.,has sales of $836,000 and cost of goods sold of $601,000.The firm had a beginning inventory of $36,000 and an ending inventory of $47,000.What is the length of the inventory period?

Accepted Answer

Inventory turnover = $601,000/[($36,000 + $47,000)/2] = 14.481928Inventory period = 365/14.481928 = 25.20 days

Quiz 18: Short-Term Finance and Planning

Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound? I.fixed expenses II.fixed asset purchases III.flexible financing policy IV.highly seasonal sales

The optimal investment in current assets for an operating firm occurs at the point where:

A national firm has sales of $729,000 and cost of goods sold of $478,000.At the beginning of the year,the inventory was $37,000.At the end of the year,the inventory balance was $41,000.What is the inventory turnover rate?

A flexible short-term financial policy: I.increases shortage costs due to frequent cash-outs. II.tends to increase sales as compared to a restrictive policy. III.requires a sizeable investment in current assets. IV.incurs more carrying costs than a restrictive policy.

A compensating balance: I.is required when a firm acquires any bank financing other than a line of credit. II.increases the cost of short-term bank financing. III.may be required even if a firm never borrows funds. IV.is often used as a means of paying for banking services received.

Shortage costs include which of the following? I.disruption of production schedules II.inventory ordering costs III.lost customer goodwill IV.brokerage costs

The most common means of financing a temporary cash deficit is a:

High Point Hotel (HPH) has $165,000 in accounts receivable.To finance a major purchase,the company assigns these receivables to Cross Town Bank.Which one of the following statements correctly describes this transaction?

A cumulative cash deficit indicates a firm:

Which one of the following statements is correct?

Which one of the following statements is correct?

Assume each month has 30 days and a firm has a 60-day accounts receivable period.During the second calendar quarter of the year,that firm will collect payment for the sales it made during which of the following months?

Which one of the following statements is correct concerning the cash balance of a firm?

The primary difference between a line of credit and a revolving credit arrangement is the:

Which one of the following statements is correct?

The Harvester collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:

Denver Interiors,Inc.,has sales of $836,000 and cost of goods sold of $601,000.The firm had a beginning inventory of $36,000 and an ending inventory of $47,000.What is the length of the inventory period?