Test Bank Chapter 18 Short-Term Finance And Planning

1.

The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: 
 

2.

The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the: 
 

3.

The length of time between the sale of inventory and the collection of the payment for that sale is called the: 
 

4.

The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the: 
 

5.

Central Supply purchased a toboggan for inventory this morning and paid cash for it. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the: 
 

6.

A graphical representation of the operating and cash cycles is called a(n): 
 

7.

Costs that increase as a firm acquires additional current assets are called _____ costs. 
 

8.

Costs that decrease as a firm acquires additional current assets are called _____ costs. 
 

9.

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a: 
 

10.

Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called a(n): 
 

11.

Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a: 
 

12.

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as: 
 

13.

Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an example of a(n): 
 

14.

Which one of the following increases cash? 
 

15.

Which of the following are uses of cash?

I. collecting a receivable
II. increasing inventory
III. obtaining a bank loan
IV. paying a supplier for previous purchases 
 

16.

Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. 
 

17.

Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0. 
 

18.

Which of the following are sources of cash?

I. decrease in inventory
II. increase in accounts receivable
III. repayment of a bond
IV. sale of preferred stock 
 

19.

Which of the following will increase the operating cycle?

I. increasing the inventory turnover rate
II. increasing the payables period
III. decreasing the receivable turnover rate
IV. decreasing the inventory level 
 

20.

Which one of the following equals the operating cycle? 
 

21.

Which one of the following will decrease the operating cycle? 
 

22.

The operating cycle describes how a product: 
 

23.

Which of the following determines the length of the operating cycle?

I. cash cycle
II. inventory period
III. accounts payable period
IV. accounts receivable period 
 

24.

Which of the following will increase the cash cycle, all else constant?

I. increasing the inventory period
II. decreasing the accounts receivable turnover rate
III. increasing the accounts payable period
IV. decreasing the accounts receivable period 
 

25.

An increase in which one of the following will decrease the cash cycle, all else equal? 
 

26.

Metal Designs, Inc., historically produced products for inventory. Now, the firm only produces a product when it receives an actual order from a customer. All else equal, this change will: 
 

27.

Which of the following statements is (are) correct?

I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle. 
 

28.

Which one of the following statements is correct concerning the cash cycle? 
 

29.

Which of the following actions will tend to decrease the inventory period?

I. discontinuing all slow-selling merchandise
II. selling obsolete inventory below cost just to get rid of it
III. buying raw materials only as needed for the manufacturing process
IV. producing goods on demand versus for inventory 
 

30.

Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days. 
 

31.

An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? 
 

32.

If you pay your suppliers five days sooner, then: 
 

33.

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

34.

Which one of the following managers determines which customers must pay cash and which can charge their purchases? 
 

35.

Which one of the following managers determines when a supplier will be paid? 
 

36.

A firm with a flexible short-term financial policy will: 
 

37.

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

38.

Which of the following are associated with a restrictive short-term financial policy?

I. little, if any, investment in marketable securities
II. liberal credit terms for customers
III. low cash balances
IV. increasing inventory levels 
 

39.

The Lumber Mart recently replaced its management team. As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating. Which of the following should the employees expect as a result of this policy change?

I. reduction in sales due to stock outs
II. greater inventory selection
III. decreased sales due to the new accounts receivable credit policy
IV. decreased investment in marketable securities 
 

40.

A flexible short-term financial policy: 
 

41.

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. 
 

42.

Shortage costs include which of the following?

I. disruption of production schedules
II. inventory ordering costs
III. lost customer goodwill
IV. brokerage costs 
 

43.

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

44.

Which one of the following statements is correct? 
 

45.

Which one of the following statements is correct? 
 

46.

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? 
 

47.

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: 
 

48.

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: 
 

49.

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? 
 

50.

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 
 

51.

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

52.

A cumulative cash deficit indicates a firm: 
 

53.

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

54.

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

55.

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. 
 

56.

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? 
 

57.

Which one of the following statements is correct? 
 

58.

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 
 

59.

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? 
 

60.

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? 
 

61.

North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 68 percent of sales. The firm has an average inventory of $23,000. How many days on average does it take the firm to sell its inventory? 
 

62.

The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of sales. The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000. How long on average does it take the firm to collect its receivables? 
 

63.

The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts receivable of $12,100, and average accounts payable of $12,600. How long does it take for the firm's credit customers to pay for their purchases? 
 

64.

The Mountain Top Shoppe has sales of $512,000, average accounts receivable of $31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent to 71 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers? 
 

65.

HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $458,000. What is the payables turnover rate? 
 

66.

Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a receivables turnover rate of 19. How long is your firm's operating cycle? 
 

67.

Merryl Enterprises currently has an operating cycle of 59 days. The firm is analyzing some operational changes, which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 42 to 46 times per year. If all of these changes are adopted, what will the firm's new operating cycle be? 
 

68.

On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87 days on average to pay for its purchases. On the other hand, its average customer pays with a credit card which allows the firm to collect its receivables in 4 days. Given this information, what is the length of operating cycle? 
 

69.

Interior Designs has an inventory period of 51 days, an accounts payable period of 38 days, and an accounts receivable period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days. 
 

70.

Metal Products Co. has an inventory period of 53 days, an accounts payable period of 68 days, and an accounts receivable turnover rate of 18. What is the length of the cash cycle? 
 

71.

West Chester Automation has an inventory turnover of 17.5 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? 
 

72.

Peterson's Antiquities currently has a 31 day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, decreases its inventory period by 3 days, and decreases its payables period by 4 days. What will the length of the cash cycle be after these changes? 
 

73.

A company currently has a 51 day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 3 days, and increases its payables period by 4 days. What will the length of the cash cycle be after these changes? 
 

74.

Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days. 
 

75.

Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Sales for February through May are $720, $780, $820, and $850, respectively. The accounts receivable period is 30 days. What is the amount of the April collections? Assume a year has 360 days. 
 

76.

Davis and Davis have expected sales of $490, $465, $450, and $570 for the months of January through April, respectively. The accounts receivable period is 28 days. What is the accounts receivable balance at the end of March? Assume a year has 360 days. 
 

77.

The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales for January through April are $440, $480, $690, and $720, respectively. The accounts receivable period is 60 days. How much did the firm collect in the month of April? Assume a year has 360 days. 
 

78.

Breakwater Aquatics has a 45 day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400, respectively. What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days. 
 

79.

The Dog House expects sales of $560, $650, $630, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? 
 

80.

  

The Wire House purchases its inventory one quarter prior to the quarter of sale. The purchase price is 55 percent of the sales price. The accounts payable period is 45 days. The accounts payable balance at the beginning of quarter one is $62,000. What is the amount of the expected disbursements for quarter two given the following expected quarterly sales? 
 

81.

Nadine's Boutique has a 30 day accounts payable period. The firm has expected quarterly sales of $1,100, $1,400, $1,600, and $2,100, respectively, for next year. The quarterly cost of goods sold is equal to 68 percent of the next quarter's sales. The firm has a beginning accounts payable balance of $550 as of Quarter 1. What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume a year has 360 days. 
 

82.

Kid's Delight expects to sell $8,200 worth of toys in December, $3,700 worth in January, $4,400 in February, and $6,100 in March. The wholesale cost is 72 percent of the retail price. The firm has a receivables period of 30 days, a payables period of 60 days, and buys inventory one month prior to selling it. Which one of the following statements is correct? 
 

83.

As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. During the quarter, the company collected $480 from customers and paid suppliers $360. The company also paid an interest payment of $20 and a tax payment of $110. In addition, the company repaid $140 on its long-term debt. What is Callahan's cash balance at the end of the quarter? 
 

84.

On May 1, your firm had a beginning cash balance of $175. Your sales for April were $430 and your May sales were $480. During May, you had cash expenses of $110 and payments on your accounts payable of $290. Your accounts receivable period is 30 days. What is your firm's beginning cash balance on June 1? 
 

85.

The Mish Mash Store has a beginning cash balance of $440 on March 1. The firm has projected sales of $610 in February, $680 in March, and $740 in April. The cost of goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 10 days. The firm has monthly cash expenses of $125. What is the projected ending cash balance at the end of March? Assume every month has 30 days. 
 

86.

Fancy Footwear has a line of credit with a local bank in the amount of $80,000. The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent, which is based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses? 
 

87.

Juno Industrial Supply has a $150,000 line of credit with a 7.5 percent interest rate. The loan agreement requires a 2 percent compensating balance, which is based on the total amount borrowed, and which will be held in an interest-free account. What is the effective interest rate if the firm borrows $90,000 on the line of credit for one year? 
 

88.

Rachel's has a $50,000 line of credit with Uptown Bank. The line of credit calls for an interest rate of 8 percent and a compensating balance of 4 percent. The compensating balance is based on the total amount borrowed and will be held in an interest-free account. What is the effective annual interest rate if the firm borrows $35,000 for one year? 
 

89.

The Delta Fish Hatchery factors its accounts receivables immediately at a 2 percent discount. The average collection period is 34 days. Assume that all accounts are collected in full. What is the effective annual interest rate on this arrangement? 
 

90.

New York Bank provides Food Canning, Inc. a $250,000 line of credit with an interest rate of 1.75 percent per quarter. The credit line also requires that 1 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Food Canning, Inc.'s short-term investments are paying 1.2 percent per quarter. What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest. 
 

91.

The Sports Store has a $100,000 line of credit with City Bank. The loan agreement requires that 2 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. The interest rate on the borrowed funds is 1.75 percent per quarter. The Sport Store's short-term investments are paying 1.5 percent per quarter. What is the effective annual interest rate on the line of credit if The Sports Store borrows the entire $100,000 for one year? Assume any funds borrowed or invested use compound interest. 
 

92.

Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter. The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 0.20 percent per month. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest. 
 

93.

New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6 percent per quarter. The loan agreement also requires that 3 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Short-term investments are currently paying 1.1 percent per quarter. What is the effective annual interest rate on the line of credit if you borrow the entire $40,000 for one year? Assume any funds borrowed or invested use compound interest. 
 

94.

Josie's Craft Shack has a beginning cash balance for the quarter of $1,126. The store has a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow funds as needed to maintain that balance. Currently, the firm has a loan balance of $480. How much will the store borrow or repay if the net cash flow for the quarter is -$280? 
 

95.

The Cement Works has a beginning cash balance for the quarter of $784. Susie, the firm's president, requires that a minimum cash balance of $900 be maintained and requires that borrowing be used to maintain that balance. If funds have been borrowed, then she requires that those loans be repaid as soon as excess funds are available. Currently, the firm has a loan outstanding of $1,260. How much will the firm borrow or repay this quarter if the quarterly receipts are $3,918 and the quarterly disbursements are $3,774? 
 

96.

At the beginning of the year, you have an outstanding short-term loan of $274 which was used to cover your cash needs for the previous year. The interest expense for the year is $19. The projected net cash flow for this year is $123, prior to any payment of principal or interest on this loan. What is your anticipated loan balance at year end? 
 

97.

Details Corp. has a book net worth of $8,150. Long-term debt is $1,800. Net working capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the company have? 
 

98.

The Wake-Up Coffee Company has projected the following quarterly sales amounts for the coming year:

  

Accounts receivable at the beginning of the year are $200. Wake-Up has a 60-day collection period. What is the amount of the accounts receivable balance at the end of Quarter 3? 
 

99.

Consider the following financial statement information for the Bulldog Icers Corporation:

  

How long is the cash cycle? 
 

100.

Your firm has an average collection period of 42 days. Current practice is to factor all receivables immediately at a 4 percent discount. Assume that default is extremely unlikely. What is the effective cost of borrowing? 
 

101.

Workout Together has projected the following sales for the coming year:

  

Sales in the year following this one are projected to be 18 percent greater in each quarter. Assume the firm places orders during each quarter equal to 35 percent of projected sales for the next quarter. How much will the firm pay to its suppliers in Quarter 2 if its accounts payable period is 60 days? 
 

102.

The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter. No capital expenditures are planned. Sales for the first quarter of the following year are projected at $720. The projected quarterly sales are:

  

What is the amount of the total disbursements for Quarter 2? 
 

103.

The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2012:

  

The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000 of which was uncollected December sales.) What is the amount of the January collections? 
 

104.

Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2012:

  

The company predicts that 3 percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase.
In March 2012, credit sales were $302,400, and credit purchases were $224,640. The April 1 cash balance was $403,200. What is the cash balance at the end of May? 
 

105.

You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.5 percent per month. In addition, 7 percent of the amount that you borrow must be deposited in a non-interest bearing account. Assume your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement? 
 

106.

A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year? 
 

107.

List and describe the three basic types of secured inventory loans. Compare the advantages and disadvantages of these loans. 
 

108.

Using two separate graphs, illustrate a flexible and a restrictive short-term financing policy. Place costs on the vertical axis and current assets on the horizontal axis. On each graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal investment in current assets. 
 

109.

Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future. How does this affect a firm's selection of a financing policy for its current assets? 
 

110.

Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower. Why, then, would borrowers agree to such terms? What other types of alternative financing are available?