Question 1

Which one of the following will increase the accounts payable period,all else constant?

Accepted Answer

An increase in the ending accounts payable balance will result in a longer accounts payable period, as the company is taking longer to pay off its debts to suppliers. All other options would decrease the accounts payable period.

Question 2

Which one of the following statements is correct?

Accepted Answer

Floor plan arrangements are designed to finance large, easily identifiable types of inventory such as automobiles, boats, and recreational vehicles. On the other hand, farmers generally use crop financing or production loans with trust receipts to obtain financing during the growing season. Drug stores typically use a blanket lien arrangement rather than trust receipts as they have a diverse inventory of items. Third-party inventory managers are a common feature of floor plan arrangements. As for the cost of loans involving commercial paper, it can be lower than bank loans depending on various factors such as credit rating and market conditions. Therefore, option B is the only statement that is correct.

Question 3

If the accounts receivable balance on a firm's balance sheet decreases without any change in credit sales,the operating cycle will:

Accepted Answer

The operating cycle is the time it takes for a firm to convert its inventory into cash. A decrease in accounts receivable balance without any change in credit sales means that the firm is collecting cash from its customers faster, resulting in a reduction in the number of days' sales in receivables. This decrease in the number of days' sales in receivables will result in a shorter operating cycle. Hence, the correct answer is B.

Question 4

Flexible short-term financial policies tend to:

Accepted Answer

Flexible short-term financial policies typically maintain large cash balances to have the ability to quickly respond to unexpected cash needs or take advantage of investment opportunities. This allows companies to have more financial flexibility and be less vulnerable to financial distress.

Question 5

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

Accepted Answer

A line of credit typically has a set time period for borrowing, whereas a revolving credit arrangement allows for continuous borrowing and repayment within a credit limit.

Question 6

The total sum of the carrying costs and the shortage costs will be lowest at the point where:

Accepted Answer

At the point where the carrying costs equal the shortage costs, the total sum of both costs will be minimized. This point is also known as the economic order quantity (EOQ). At the EOQ, the costs of holding inventory (carrying costs) equals the costs of not having enough inventory (shortage costs). As a result, any increase or decrease in the order quantity will result in an increase in one cost and a decrease in the other, leading to an increase in the total cost. Therefore, the optimal order quantity is the one where carrying and shortage costs are equal, resulting in the lowest total cost.

Question 7

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

Accepted Answer

A short-term unsecured bank loan, also known as a line of credit, is the most common means of financing a temporary cash deficit. It allows the company to borrow funds without having to put up collateral and can be easily paid back once cash flow improves. Short-term issues of corporate bonds or secured bank loans may not be necessary for a temporary cash flow issue and long-term loans would be inappropriate as they require longer repayment periods.

Question 8

If you delay paying your suppliers by an additional ten days,then:

Accepted Answer

The answer of If you delay paying your suppliers by...

Question 9

A flexible short-term financial policy:

Accepted Answer

A flexible short-term financial policy utilizes short-term financing to fund some of the firm's assets while also investing in longer term assets. While this approach may allow for greater financial flexibility, it also incurs an opportunity cost due to the lower rate of return that typically applies to short-term assets. This means that the overall returns on the firm's assets may be lower than if they had been funded solely through longer-term financing.

Question 10

A restrictive short-term financial policy tends to:

Accepted Answer

A restrictive short-term financial policy may result in reduced sales due to difficulty in granting credit to customers or reducing credit terms. This can lead to a loss of potential future sales, making it a less favorable option than a more flexible policy in the long run.

Question 11

A monthly cumulative cash deficit indicates a firm:

Accepted Answer

A monthly cumulative cash deficit means the firm is spending more cash than it is bringing in, indicating a short-term need for external funding to cover its expenses. It does not necessarily mean the firm is in long-term financial distress or will go out of business within the year. A firm capable of funding all its needs internally would not have a monthly cumulative cash deficit. Thus, option E is the most appropriate choice.

Question 12

A compensating balance:
I.is required when a firm acquires bank financing other than a line of credit.
II.increases the cost of short-term bank financing.
III.represents an opportunity cost to the lending institution.
IV.is often used as a means of paying for banking services received.

Accepted Answer

A compensating balance is a minimum balance that a borrower is required to maintain in its account with the lender as a condition of obtaining a loan or other financing. It does increase the cost of short-term bank financing since the borrower is essentially paying interest on the amount of the compensating balance, which reduces the effective amount of the loan. It does not represent an opportunity cost to the lending institution since the lending institution typically earns interest on the entire loan amount. However, a compensating balance is often used as a means of paying for banking services received, such as checking account fees or other charges. Therefore, II and IV are correct, while I and III are incorrect.

Question 13

Your firm collects 20 percent of sales in the month of sale,65 percent of sales in the month following the month of sale and 13 percent of sales in the second month following the month of sale.Given this,you will collect _____ sales during the month of May.

Accepted Answer

The answer of Your firm collects 20 percent of sales...

Question 14

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 fairly equal in all quarters.Assume all other disbursements are also equal throughout the year.Assume a 360 day year.The firm is most apt to face a cash-out situation in:

Accepted Answer

The answer of A manufacturing firm has a 90 day...

Question 15

Southern Markets has an accounts receivable period of 30 days.In the first quarter of a calendar year,the firm's accounts receivable collections will equal its credit sales for the months of:

Accepted Answer

The answer of Southern Markets has an accounts receivable period...

Question 16

A restrictive short-term financial policy,as compared to a more flexible policy,tends to:
I.cause a firm to lose sales due to a lack of inventory on hand.
II.increase the sales of a firm due to the firm's credit availability and terms.
III.increase the probability that a firm will face a cash-out situation.
IV.increase the ability of a firm to charge premium prices.

Accepted Answer

A restrictive short-term financial policy limits the amount of inventory a firm can have on hand, which can result in a loss of sales due to lack of inventory. Additionally, it increases the probability that a firm will face a cash-out situation, where it may not have enough cash on hand to cover its expenses. It does not necessarily increase the sales of a firm or its ability to charge premium prices.

Question 17

A flexible short-term financial policy:

Accepted Answer

The answer of A flexible short-term financial policy:
...

Question 18

Assume Fido's Pets has a flexible short-term financing policy and no unusual or one-time expenditures are expected.The firm's sales vary by as much as 15 percent from one season to another.During the year,or part of the year,the firm will:
I.invest in some short-term marketable securities.
II.encounter a cash-out.
III.have sufficient funding for all of its total assets.
IV.require some short-term financing.

Accepted Answer

The answer of Assume Fido's Pets has a flexible short-term...

Question 19

Which of the following are associated with a restrictive short-term financial policy?
I.Large investments in marketable securities
II.Liberal credit terms for customers
III.Minimal cash balances
IV.Minimal credit sales

Accepted Answer

A restrictive short-term financial policy is characterized by minimizing cash balances and credit sales to maintain a tight control over the company's cash flow. Therefore, options I and II are not associated with this policy. Instead, options III and IV align with the objectives of a restrictive financial policy as they emphasize reduced credit sales and cash balances. Thus, the correct answer is D, III and IV only.

Question 20

Which of these occur during an annual cycle if a firm with a positive rate of growth adopts a compromise financing policy?
I.Some short-term financing
II.Increase in fixed and permanent current assets
III.Short-term financing in excess of long-term financing
IV.Long-term financing sufficient to cover all asset requirements

Accepted Answer

A compromise financing policy involves using a mix of short-term and long-term financing, so some short-term financing (I) will be used. Additionally, as the firm grows, it will likely see an increase in fixed and permanent current assets (II).

Quiz 18: Short-Term Finance and Planning

Which one of the following will increase the accounts payable period,all else constant?

Which one of the following statements is correct?

If the accounts receivable balance on a firm's balance sheet decreases without any change in credit sales,the operating cycle will:

Flexible short-term financial policies tend to:

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

The total sum of the carrying costs and the shortage costs will be lowest at the point where:

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

If you delay paying your suppliers by an additional ten days,then:

A flexible short-term financial policy:

A restrictive short-term financial policy tends to:

A monthly cumulative cash deficit indicates a firm:

A compensating balance: I.is required when a firm acquires bank financing other than a line of credit. II.increases the cost of short-term bank financing. III.represents an opportunity cost to the lending institution. IV.is often used as a means of paying for banking services received.

Your firm collects 20 percent of sales in the month of sale,65 percent of sales in the month following the month of sale and 13 percent of sales in the second month following the month of sale.Given this,you will collect _____ sales during the month of May.

Southern Markets has an accounts receivable period of 30 days.In the first quarter of a calendar year,the firm's accounts receivable collections will equal its credit sales for the months of:

A flexible short-term financial policy:

Which of the following are associated with a restrictive short-term financial policy? I.Large investments in marketable securities II.Liberal credit terms for customers III.Minimal cash balances IV.Minimal credit sales