Question 1

Baxter's collects 30 percent of its sales in the month of sale,55 percent in the month following the month of sale,and 13 percent in the second month following the month of sale.Given this,the company will collect ________ sales during the month of May.

Accepted Answer

B  C  In May, Baxter's will collect 30% of May sales, 55% of March sales, and 13% of April sales based on their collection pattern.

Question 2

Which party(ies)is(are)ultimately responsible for an invoice from a supplier that is subject to a bankers' acceptance?

Accepted Answer

A banker's acceptance is a promise that the bank will pay the invoice amount on behalf of the purchasing firm, making the bank ultimately responsible for the payment.

Question 3

Bilt Rite has sales of $610,000 and cost of goods sold equal to 68 percent of sales.The beginning accounts receivable balance is $58,900 and the ending accounts receivable balance is $61,050.How long on average does it take the firm to collect its receivables?

Accepted Answer

The correct answer is A.The average collection period is calculated as (Ending accounts receivable + Beginning accounts receivable) / 2 / (Sales / 365).In this case, the average collection period is ($61,050 + $58,900) / 2 / ($610,000 / 365) = 35.89 days.

Question 4

A cumulative cash deficit indicates a firm:

Accepted Answer

A cumulative cash deficit means that a company has been consistently experiencing negative cash flows over a period of time. This indicates that the company may have a short-term need for external funding to continue operations and meet its obligations.

Question 5

Heritage Farms has sales of $1.62 million with costs of goods sold equal to 78 percent of sales.The average inventory is $369,000,accounts payable average $438,000,and receivables average $147,000.How long is the cash cycle?

Accepted Answer

The cash cycle is calculated as the inventory period plus the receivables period minus the payables period. First, calculate each period:1. Inventory turnover = Cost of Goods Sold / Average Inventory = (0.78 * 1,620,000) / 369,000 = 3.42 times. The inventory period = 365 / Inventory turnover = 365 / 3.42 = 106.73 days.2. Receivables turnover = Sales / Average Receivables = 1,620,000 / 147,000 = 11.02 times. The receivables period = 365 / Receivables turnover = 365 / 11.02 = 33.12 days.3. Payables turnover = Cost of Goods Sold / Average Payables = (0.78 * 1,620,000) / 438,000 = 2.88 times. The payables period = 365 / Payables turnover = 365 / 2.88 = 126.65 days.Cash cycle = Inventory period + Receivables period - Payables period = 106.73 + 33.12 - 126.65 = 13.20 days. The closest option to this calculation is 13.19 days, so there might be a slight rounding difference in the calculation steps.

Question 6

Which one of these statements is true?

Accepted Answer

A negative cumulative cash surplus indicates that a company has spent more cash than it has earned. This signifies a net borrowing requirement to cover the shortfall. The other statements are false. For example, maintaining a zero cash balance is not a common practice as it may not offer sufficient liquidity to meet unplanned expenses. Similarly, the minimum cash balance may remain constant or change based on the company's cash flow needs and operations. A financially sound firm can have negative cash flow in a particular quarter when it incurs one-time expenses or invests in a growth opportunity.  The cumulative finance surplus requirement is computed after adjusting for the minimum cash balance.

Question 7

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

Accepted Answer

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a compensating balance. This is often required by banks as a condition for providing a loan and helps to offset the risk of loan defaults.

Question 8

A type of short-term loan where the borrower sells its receivables to the lender up-front,but at a discount to face value,is called:

Accepted Answer

Factored receivables financing involves the borrower selling its receivables to the lender at a discount to face value. The lender assumes the risk of collecting the full amount from the customers. This provides the borrower with immediate cash flow but at a cost of the discount applied to the receivables.

Question 9

A compensating balance:

Accepted Answer

A compensating balance is a portion of a loan amount that a borrower is required to keep on deposit in a bank account as a condition of receiving the loan. The bank can use these funds to offset the costs of providing banking services to the borrower, making it a means of paying for banking services received.

Question 10

A financially solid firm is most apt to have a quarterly cash shortfall when it encounters a:

Accepted Answer

A major fixed asset expenditure can result in a large outflow of cash, which may result in a temporary cash shortfall, despite the firm being financially solid.

Question 11

Commercial paper is generally issued:

Accepted Answer

Commercial paper is a short-term, unsecured promissory note issued by large firms to raise funds. It is typically issued for 190 days or less and is sold at a discount from face value.

Question 12

Which one of these statements is correct?

Accepted Answer

Trust receipt financing is typically used for large, easily identifiable types of inventory, such as automobiles or large equipment, where the lender retains the title until the item is sold.

Question 13

Last year,Wilson's had credit sales of $927,000 and cost of goods sold of $762,000.The beginning of the year inventory was $138,000 and the end of the year inventory was $154,300.If the accounts receivables average $87,400,what is the operating cycle?

Accepted Answer

Operating cycle= DIO + DSO
where DIO=Days Inventory Outstanding= (Average inventory/Cost of Goods Sold) x 365 days
and DSO=Days Sales Outstanding= (Accounts Receivables/Credit Sales) x 365 days

DIO=((Beginning inventory+Ending inventory)/2 / Cost of Goods Sold) x 365 days
=((138,000+154,300)/2 / 762,000) x 365 days
=82.46 days

DSO=(Accounts Receivables/ Credit Sales) x 365 days
=(87,400 / 927,000) x 365 days
=34.57 days

Therefore, operating cycle= DIO + DSO
=82.46 days+ 34.57 days
=116.03 days

Since none of the answer choices are exactly equal to 116.03 days, we need to round to the nearest option. 
The closest option is B) 104.42 days.

Question 14

A prearranged,short-term bank loan up to a specified limit,made on a formal or informal basis,is called a:

Accepted Answer

A prearranged, short-term bank loan up to a specified limit made on a formal or informal basis is called a line of credit. A line of credit is often used by businesses to provide flexibility and quick access to funds for working capital needs. The borrower can draw on the line of credit as needed up to the specified limit, and interest is only charged on the amount borrowed.

Question 15

A short-term loan where the lender holds the borrower's receivables as security is called:

Accepted Answer

Assigned receivables financing is a type of short-term loan where the lender holds the borrower's receivables as security.

Question 16

Brook Side reported sales of $738,000 and cost of goods sold of $584,000 for the year.The firm had a beginning inventory of $51,000 and an ending inventory of $46,000.What is the length of the inventory period?

Accepted Answer

The answer of Brook Side reported sales of $738,000 and...

Question 17

If your accounts receivable period is 30 days,you will collect payment for your ________ sales during the second quarter of a calendar year.

Accepted Answer

The second quarter of a calendar year includes April, May, and June. With an accounts receivable period of 30 days, you would collect payment for sales made in March, April, and May during the second quarter.

Question 18

A short-term loan which is secured by inventory that is held in trust is referred to as:

Accepted Answer

A trust receipt financing arrangement is a short-term loan that is secured by inventory that is held in trust. The borrower pledges the inventory as collateral, and the lender releases the funds to the borrower to purchase more inventory. The borrower then holds the inventory in trust for the lender until the loan is repaid. This type of financing is commonly used for international trade transactions.

Question 19

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 third quarter of a year.The firm maintains a relatively steady level of production which means that its cash disbursements are approximately equal in all quarters.The firm is most apt to face a cash-out situation in:

Accepted Answer

The firm is most likely to face a cash-out situation in the second quarter because it has the least sales in the first quarter, and with a 90-day collection period, the cash from these sales would be collected in the second quarter. Since production costs are steady, the firm may not have enough cash inflow to cover its expenses in the second quarter.

Question 20

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

Accepted Answer

A temporary cash deficit is typically a short-term problem, so a short-term financing option would be most appropriate. Unsecured bank loans are a common option for small businesses to quickly obtain cash without having to provide collateral.

Quiz 26: Short-Term Finance and Planning