Question 1

Which of the following costs will tend to increase if a firm switches from a flexible short-term policy to a restrictive short-term financial 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 maintaining lower levels of inventory and cash, which can lead to increased lost sales due to out-of-stock items (I) and increased cash-outs (III) due to less liquidity. Additionally, total annual order costs (IV) may increase as more frequent orders are needed to maintain lower inventory levels. Inventory warehousing costs (II) would likely decrease, not increase, as less inventory is held.

Question 2

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

Accepted Answer

Minimising the cash balances held by the firm is indicative of a restrictive short-term financial policy as it limits the amount of cash available for immediate needs and signifies a focus on managing cash flow tightly. A more relaxed short-term financial policy might involve maintaining higher cash balances to cover unexpected expenses or to take advantage of investment opportunities. The other options - expanding inventory items carried, granting increasing amounts of credit, investing in marketable securities, or increasing the firm's investment in current accounts - would be more indicative of a more loose or aggressive short-term financial policy.

Question 3

Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?

Accepted Answer

The length of time that a retailer owes its supplier for an inventory purchase is known as the accounts payable period. This represents the time period between the receipt of goods or services and the payment due date to the supplier. It is an important metric for managing cash flow and the retailer's relationship with its suppliers.

Question 4

By definition,an inventory loan is which one of the following types of loan?

Accepted Answer

An inventory loan is a type of secured short-term loan where the borrower uses inventory as collateral to secure the loan. The lender often requires regular inventory audits to ensure the inventory is still present and in sellable condition.

Question 5

Moore & Moore has just finished projecting its expected cash receipts and expenditures for next year.What is this projection called?

Accepted Answer

The projection that Moore & Moore has just finished is called a cash budget, which is a forecast of the company's expected cash receipts and expenditures over a specified period of time, usually one year. The cash budget is an important tool for businesses to manage their cash flow and ensure they have enough cash on hand to meet their financial obligations.

Question 6

Accounts receivable financing is the term used to describe which of the following types of loans which involve either the assignment or the factoring of a firm's accounts receivables?

Accepted Answer

Accounts receivable financing typically involves a short-term loan that is secured by the firm's accounts receivables. Therefore, the best choice is E - secured short-term loan.

Question 7

The amount of time that a firm holds inventory in stock is referred to as which one of the following?

Accepted Answer

The inventory period refers to the amount of time that inventory is held by a firm, from the time it is purchased until it is sold. This is a key metric for inventory management and supply chain efficiency. Choice B, operating cycle, refers to the time it takes for a firm to convert its inventory into cash and then use that cash to pay its operating expenses. Choices C, D, and E refer to other aspects of the cash flow cycle, including payment of accounts payable, collection of accounts receivable, and the overall cash conversion cycle.

Question 8

The accounts receivable period is the time that elapses between the _____ and the _____.

Accepted Answer

The accounts receivable period is the time that elapses between the sale of inventory (or services) and the collection of the receivable from the customer. Choices A, B, D, and E all involve the purchase of inventory or payment to suppliers, which is not relevant to the accounts receivable period.

Question 9

Which one of the following best describes a line of credit?

Accepted Answer

A line of credit is a type of short-term prearranged bank loan that can be either committed (meaning the lender commits to lending a certain amount) or noncommitted (meaning the lender does not commit to lending a certain amount). It provides flexibility in borrowing and repayment.

Question 10

Which of the following costs tend to rise when a firm switches from a restrictive financial policy to a flexible 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 typically holds more inventory and cash, leading to higher storage costs and increased current-asset opportunity costs due to the capital tied up in these assets.

Question 11

Generally speaking,which of the following situations will occur if a seasonal company adopts a compromise financial policy?
I.periods where short-term financing is required
II less long-term debt than if the firm followed a restrictive financial policy
III.periods of excess funds which can be invested in short-term marketable securities
IV.lower investment in fixed assets than if the firm adopted a flexible financial policy

Accepted Answer

A compromise financial policy balances between aggressive and conservative approaches, leading to periods where short-term financing is needed (I) and times when excess funds can be invested in short-term securities (III).

Question 12

Which one of the following statements is correct?

Accepted Answer

A flexible financial policy allows a firm to maintain higher liquidity and reserves, reducing the risk of financial distress compared to a restrictive policy.

Question 13

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 14

Which one of the following defines the cash cycle?

Accepted Answer

The cash cycle is the amount of time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. It is calculated by subtracting the accounts payable period from the operating cycle, which is the length of time it takes for a company to convert its inventory into sales and receive payment for them. Therefore, choice D (operating cycle minus the accounts payable period) defines the cash cycle.

Question 15

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 liquidity, which is reflected in a high ratio of current assets to sales, allowing the company to easily meet its short-term obligations and adapt to changing circumstances.

Question 16

Which one of the following is directly related to increases in a firm's current assets?

Accepted Answer

Carrying costs are directly related to increases in a firm's current assets because they represent the costs associated with holding and maintaining inventory.

Question 17

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

Accepted Answer

An increase in the inventory turnover rate means that inventory is being sold more quickly, which reduces the time inventory is held and thus decreases the cash cycle.

Question 18

A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will have?
I.uncollectable accounts receivables
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 will have a higher risk of uncollectable accounts receivables and obsolete or out-of-date inventory because it allows for more lenient credit terms and a larger inventory stock. However, it will have lower carrying costs due to the ability to quickly adjust inventory levels and will likely avoid work stoppages for lack of raw materials by maintaining a higher inventory. Therefore, I, III, and IV are more likely to be present with a flexible short-term financial policy than a restrictive policy.

Question 19

Which of the following are inversely related to increases in a firm's current assets?
I.re-order costs
II.shortage costs
III.restocking costs
IV.carrying costs

Accepted Answer

The answer of Which of the following are inversely related...

Question 20

Black Water Mills is operating at its optimal point.Which one of the following conditions exists given this firm's operating status?

Accepted Answer

At the optimal point, a firm balances carrying costs and shortage costs, meaning they are equal.

Quiz 16: Short-Term Financial Planning

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