Chap018

Chapter 18 - Short-Term Finance and Planning

Chapter 18Short-Term Finance and Planning

Multiple Choice Questions

1. The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

3. The length of time between the sale of inventory and the collection of the payment for that sale is called the: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

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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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

6. A graphical representation of the operating and cash cycles is called a(n): A. operating chart.B. cash flow time line.C. production flow line.D. component chart.E. working time line.

7. Costs that increase as a firm acquires additional current assets are called _____ costs. A. carryingB. shortageC. orderD. safetyE. trading

8. Costs that decrease as a firm acquires additional current assets are called _____ costs. A. carryingB. shortageC. debtD. equityE. payables

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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: A. pro forma income statement.B. sales projection.C. cash budget.D. receivables analysis.E. credit analysis.

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): A. floor loan.B. open loan.C. compensating balance.D. line of credit.E. bank note.

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: A. compensating balance.B. secured credit deposit.C. letter of credit.D. line of credit.E. pledge.

12. Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as: A. accounts receivable financing.B. pledged financing.C. capital funding.D. daily funding.E. capital financing.

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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): A. debenture.B. line of credit.C. banker's acceptance.D. working loan.E. inventory loan.

14. Which one of the following increases cash? A. granting credit to a customerB. purchasing new machineryC. making a payment on a bank loanD. purchasing inventoryE. accepting credit from a supplier

15. Which of the following are uses of cash?I. collecting a receivableII. increasing inventoryIII. obtaining a bank loanIV. paying a supplier for previous purchases A. I and III onlyB. II and IV onlyC. I and II onlyD. I, II, and IV onlyE. II, III, and IV only

16. Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. A. paying a supplier for a previous purchaseB. paying off a long-term debtC. selling inventory at costD. purchasing inventory on creditE. selling inventory at a profit on credit

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17. Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0. A. selling inventory at costB. collecting payment from a customerC. paying a payment on a long-term debtD. selling a fixed asset for book valueE. paying a supplier for the purchase of an inventory item

18. Which of the following are sources of cash?I. decrease in inventoryII. increase in accounts receivableIII. repayment of a bondIV. sale of preferred stock A. I and III onlyB. I and IV onlyC. II and III onlyD. I, II, and III onlyE. I, III, and IV only

19. Which of the following will increase the operating cycle?I. increasing the inventory turnover rateII. increasing the payables periodIII. decreasing the receivable turnover rateIV. decreasing the inventory level A. I onlyB. III onlyC. II and IV onlyD. I and IV onlyE. II and III only

20. Which one of the following equals the operating cycle? A. cash cycle plus accounts receivable periodB. inventory period plus the accounts receivable periodC. inventory period plus the accounts payable periodD. accounts payable period minus the cash cycleE. accounts payable period plus the accounts receivable period

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21. Which one of the following will decrease the operating cycle? A. decreasing the inventory turnover rateB. decreasing the accounts payable periodC. increasing the accounts receivable turnover rateD. increasing the accounts payable periodE. increasing the accounts receivable period

22. The operating cycle describes how a product: A. is priced.B. is sold.C. moves through the current asset accounts.D. moves through the production process.E. generates a profit.

23. Which of the following determines the length of the operating cycle?I. cash cycleII. inventory periodIII. accounts payable periodIV. accounts receivable period A. I and III onlyB. II and IV onlyC. I, II, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV

24. Which of the following will increase the cash cycle, all else constant?I. increasing the inventory periodII. decreasing the accounts receivable turnover rateIII. increasing the accounts payable periodIV. decreasing the accounts receivable period A. I and II onlyB. III and IV onlyC. I and IV onlyD. I, II, and III onlyE. I, III, and IV only

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25. An increase in which one of the following will decrease the cash cycle, all else equal? A. payables turnoverB. days sales in inventoryC. operating cycleD. inventory turnover rateE. accounts receivable period

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: A. increase the operating cycle.B. lengthen the accounts receivable period.C. shorten the accounts payable period.D. decrease the cash cycle.E. decrease the inventory turnover rate.

27. Which of the following statements 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. A. I onlyB. III and IV onlyC. I and III onlyD. I and IV onlyE. I, II, and III only

28. Which one of the following statements is correct concerning the cash cycle? A. The longer the cash cycle, the more likely a firm will need external financing.B. Increasing the accounts payable period increases the cash cycle.C. A positive cash cycle is preferable to a negative cash cycle.D. The cash cycle can exceed the operating cycle if the payables period is equal to zero.E. Offering early payment discounts to customers will tend to increase the cash cycle.

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29. Which of the following actions will tend to decrease the inventory period?I. discontinuing all slow-selling merchandiseII. selling obsolete inventory below cost just to get rid of itIII. buying raw materials only as needed for the manufacturing processIV. producing goods on demand versus for inventory A. I and III onlyB. II and IV onlyC. II, III, and IV onlyD. I, II, and III onlyE. I, II, III, and IV

30. Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days. A. tightening the standards for granting credit to customersB. refusing to grant additional credit to any customer who pays lateC. increasing the finance charges applied to all customer balances outstanding over thirty daysD. granting discounts for cash salesE. eliminating the discount for early payment by credit customers

31. An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? A. bad debtsB. accounts receivable turnover rateC. accounts receivable periodD. credit salesE. operating cycle

32. If you pay your suppliers five days sooner, then: A. your payables turnover rate will decrease.B. you may require additional funds from other sources to fund the cash cycle.C. the cash cycle will decrease.D. your operating cycle will increase.E. the accounts receivable period will decrease.

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33. Which one of the following will increase the accounts payable period, all else constant? A. an increase in the cost of goods sold account valueB. an increase in the ending accounts payable balanceC. an increase in the cash cycleD. a decrease in the operating cycleE. an increase in the accounts payable turnover rate

34. Which one of the following managers determines which customers must pay cash and which can charge their purchases? A. purchasing managerB. credit managerC. controllerD. production managerE. payables manager

35. Which one of the following managers determines when a supplier will be paid? A. controllerB. payables managerC. credit managerD. purchasing managerE. production manager

36. A firm with a flexible short-term financial policy will: A. maintain a low balance in accounts receivables.B. only have minimal amounts, if any, invested in marketable securities.C. invest heavily in inventory.D. have low cash balances.E. have tight restrictions on granting credit to customers.

37. Which one of the following is indicative of a short-term restrictive financial policy? A. purchasing inventory on an as-needed basisB. granting credit to all customersC. investing heavily in marketable securitiesD. maintaining a large accounts receivable balanceE. keeping inventory levels high

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38. Which of the following are associated with a restrictive short-term financial policy?I. little, if any, investment in marketable securitiesII. liberal credit terms for customersIII. low cash balancesIV. increasing inventory levels A. I and III onlyB. II and IV onlyC. I and IV onlyD. III and IV onlyE. I, II, and III only

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 outsII. greater inventory selectionIII. decreased sales due to the new accounts receivable credit policyIV. decreased investment in marketable securities A. I and II onlyB. II and IV onlyC. I, II, and IV onlyD. I, III, and IV onlyE. I, II, III, and IV

40. A flexible short-term financial policy: A. increases a firm's need for long-term financing.B. minimizes net working capital.C. avoids bad debts by only selling items for cash.D. maximizes fixed assets and minimizes current assets.E. is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs.

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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. A. I and IV onlyB. II and III onlyC. I, II, and III onlyD. II, III, and IV onlyE. I, III, and IV only

42. Shortage costs include which of the following?I. disruption of production schedulesII. inventory ordering costsIII. lost customer goodwillIV. brokerage costs A. I and II onlyB. II and III onlyC. II, III, and IV onlyD. I, II, and III onlyE. I, II, III, and IV

43. The optimal investment in current assets for an operating firm occurs at the point where: A. both shortage costs and carrying costs equal zero.B. shortage costs are equal to zero.C. carrying costs are equal to zero.D. carrying costs exceed shortage costs.E. the total costs of holding current assets is minimized.

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44. Which one of the following statements is correct? A. A firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets.B. A firm with a flexible financing policy frequently invests in marketable securities.C. A firm with a flexible financing policy tends to use short-term financing on a frequent basis.D. Firms tend to avoid short-term financing under both restrictive and flexible financing policies.E. Firms with seasonal sales select flexible financing policies.

45. Which one of the following statements is correct? A. Seasonal needs are financed externally when firms adhere to a flexible financing policy.B. A flexible financing policy tends to increase the risk of encountering financial distress.C. Long-term interest rates tend to be less volatile than short-term rates.D. Most firms tend to finance inventory with long-term debt.E. Short-term interest rates are generally higher than long-term rates.

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? A. October, November, and DecemberB. November, December, and JanuaryC. December, January, and FebruaryD. January, February, and MarchE. February, March, and April

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: A. 60 percent of February sales.B. 15 percent of April sales.C. 60 percent of March sales.D. 15 percent of March sales.E. 25 percent of February sales.

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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: A. the first quarter.B. the second quarter.C. the third quarter.D. the fourth quarter.E. any quarter with equal probabilities of occurrence.

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? A. Inventory purchases will be highest during the months of July and August.B. Inventory purchases will be highest during the months of May and June.C. Payments to suppliers will be highest during the months of June and July.D. Payments to suppliers will be highest during the months of July and August.E. Payments to suppliers will be highest during the months of August and September.

50. Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound?I. fixed expensesII. fixed asset purchasesIII. flexible financing policyIV. highly seasonal sales A. I and III onlyB. II and IV onlyC. III and IV onlyD. I, II, and III onlyE. II, III, and IV only

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51. Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times.B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.C. On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance.D. A cumulative cash deficit indicates a borrowing need.E. The ending cash balance must equal the minimum desired cash balance.

52. A cumulative cash deficit indicates a firm: A. has at least a short-term need for external funding.B. is facing long-term financial distress.C. will go out of business within the year.D. is capable of funding all of its needs internally.E. is using its cash wisely.

53. The most common means of financing a temporary cash deficit is a: A. long-term secured bank loan.B. short-term secured bank loan.C. short-term issue of corporate bonds.D. long-term unsecured bank loan.E. short-term unsecured bank loan.

54. The primary difference between a line of credit and a revolving credit arrangement is the: A. type of collateral used to secure the loan.B. length of the credit period.C. fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured.D. fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured.E. classification as either a committed or a noncommitted loan.

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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. A. I and III onlyB. II and IV onlyC. II and III onlyD. I and IV onlyE. II, III, and IV only

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? A. HPH will immediately receive $165,000 and will have no further obligation related to these receivables.B. HPH will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables.C. Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays HPH a discounted value for its receivables.D. Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays HPH a discounted price for the accounts collected after the normal collection period has elapsed.E. HPH receives the full amount of its receivables upon assignment but must reimburse Cross Town Bank for any uncollected account.

57. Which one of the following statements is correct? A. The assignment of receivables involves selling the firm's accounts receivables at full price.B. Lines of credit frequently require a cleanup period.C. With maturity factoring, the borrower receives the loan amount immediately.D. Commercial paper is short-term financing offered to highly-rated corporations by major banks.E. Credit card receivables funding is a relatively inexpensive method of borrowing on a short-term basis.

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

59. Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length of the inventory period? A. 19.21 daysB. 20.89 daysC. 26.72 daysD. 30.53 daysE. 33.69 days

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? A. 12.26 timesB. 12.78 timesC. 14.22 timesD. 18.56 timesE. 19.70 times

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61. North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 72 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? A. 11.24 daysB. 12.30 daysC. 16.48 daysD. 26.35 daysE. 29.68 days

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? A. 17.26 daysB. 17.78 daysC. 18.58 daysD. 20.44 daysE. 29.77 days

63. The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts receivable of $9,800, and average accounts payable of $12,600. How long does it take for the firm's credit customers to pay for their purchases? A. 7.67 daysB. 8.78 daysC. 9.24 daysD. 11.88 daysE. 13.81 days

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? A. 21.76 daysB. 22.38 daysC. 24.90 daysD. 25.89 daysE. 26.67 days

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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 $442,000. What is the payables turnover rate? A. 7.86 timesB. 8.39 timesC. 9.02 timesD. 9.86 timesE. 10.85 times

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? A. 45.06 daysB. 45.28 daysC. 45.63 daysD. 53.13 daysE. 53.78 days

67. Merryl Enterprises currently has an operating cycle of 62 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? A. 51 daysB. 57 daysC. 59 daysD. 60 daysE. 65 days

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? A. 31 daysB. 38 daysC. 45 daysD. 56 daysE. 62 days

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69. Interior Designs has an inventory period of 46 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. A. 52B. 62C. 71D. 78E. 91

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? A. 3.00 daysB. 5.28 daysC. 26.28 daysD. 71.00 daysE. 73.28 days

71. West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? A. 5.67 daysB. 25.63 daysC. 41.00 daysD. 52.00 daysE. 58.81 days

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? A. 22 daysB. 23 daysC. 29 daysD. 30 daysE. 31 days

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73. A company currently has a 48 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? A. 42 daysB. 43 daysC. 45 daysD. 47 daysE. 49 days

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. A. The firm will collect $800 in Quarter 2.B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.C. The firm will collect $2,000 in Quarter 3.D. The firm will have an accounts receivable balance of $2,300 at the end of the year.E. The firm will collect a total of $2,400 in Quarter 4.

75. Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Sales for February through May are $720, $760, $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. A. $720B. $760C. $790D. $820E. $850

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. A. $420B. $426C. $440D. $450E. $482

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77. The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales for January through April are $440, $460, $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. A. $410B. $440C. $460D. $690E. $720

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. A. $3,400B. $3,550C. $6,950D. $7,100E. $7,650

79. The Dog House expects sales of $560, $650, $670, 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? A. $621B. $628C. $633D. $639E. $643

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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?

A. $20,500B. $21,725C. $24,250D. $26,000E. $26,675

81. Nadine's Boutique has a 30 day accounts payable period. The firm has expected quarterly sales of $1,100, $1,400, $1,700, 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. A. $1,195B. $1,208C. $1,247D. $1,337E. $1,380

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? A. The February payments to suppliers are $2,992.B. The March collections are $3,700.C. The accounts receivable balance at the end of March is $4,400.D. The purchases for February are $3,168.E. The accounts payable balance at the end of January is $5,832.

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83. As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. During the quarter, the company collected $520 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? A. -$110B. $320C. $350D. $430E. $490

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? A. $145B. $155C. $205D. $215E. $265

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 $160. What is the projected ending cash balance at the end of March? Assume every month has 30 days. A. $258B. $461C. $507D. $567E. $621

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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? A. 7.37 percentB. 7.43 percentC. 7.56 percentD. 8.17 percentE. 8.33 percent

87. Juno Industrial Supply has a $150,000 line of credit with a 6.5 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? A. 6.42 percentB. 6.47 percentC. 6.50 percentD. 6.58 percentE. 6.63 percent

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? A. 7.76 percentB. 8.00 percentC. 8.17 percentD. 8.33 percentE. 8.42 percent

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89. The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 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? A. 17.61 percentB. 18.20 percentC. 18.36 percentD. 18.78 percentE. 19.04 percent

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. A. 4.76 percentB. 4.80 percentC. 4.89 percentD. 7.00 percentE. 7.27 percent

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 1.4 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. A. 5.72 percentB. 5.76 percentC. 6.00 percentD. 6.08 percentE. 6.14 percent

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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. A. 2.00 percentB. 2.43 percentC. 3.18 percentD. 7.00 percentE. 7.19 percent

93. New Town Bank offers you a $40,000 line of credit with an interest rate of 1.85 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. A. 4.47 percentB. 4.58 percentC. 7.61 percentD. 7.78 percentE. 12.33 percent

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? A. $0B. $28C. $126D. $154E. $280

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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 $800 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? A. borrow $16B. borrow $128C. borrow $144D. repay $128E. repay $144

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? A. $151B. $170C. $176D. $189E. $193

Essay Questions

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

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98. 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.

99. 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?

100. 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?

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101. Details Corp. has a book net worth of $8,150. Long-term debt is $1,650. Net working capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the company have? A. $4,250B. $4,550C. $5,150D. $5,650E. $6,750

102. 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? A. $375B. $450C. $500D. $600E. $700

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

How long is the cash cycle? A. 36.6 daysB. 37.2 daysC. 41.0 daysD. 41.4 daysE. 42.8 days

104. 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? A. 28.79 percentB. 36.20 percentC. 37.78 percentD. 40.97 percentE. 42.58 percent

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105. 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 29 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? A. $212.67B. $224.33C. $241.67D. $251.33E. $256.67

106. 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? A. $564.27B. $579.43C. $582.15D. $585.30E. $590.67

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107. The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009:

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? A. $112,400.00B. $112,408.16C. $115,703.03D. $122,356.33E. $125,400.00

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108. Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:

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 2009, 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? A. $348,887B. $366,846C. $414,141D. $457,777E. $477,374

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109. 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, 5 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? A. 6.50 percentB. 6.62 percentC. 6.81 percentD. 6.87 percentE. 6.94 percent

110. 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? A. 0 percentB. 5.0 percentC. 5.2 percentD. 5.3 percentE. 5.5 percent

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Chapter 18 Short-Term Finance and Planning Answer Key


1. The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.

Refer to section 18.2

AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Operating cycle

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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Inventory period

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3. The length of time between the sale of inventory and the collection of the payment for that sale is called the: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts receivable period

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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts payable period

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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: A. operating cycle.B. inventory period.C. accounts receivable period.D. accounts payable period.E. cash cycle.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Cash cycle

6. A graphical representation of the operating and cash cycles is called a(n): A. operating chart.B. cash flow time line.C. production flow line.D. component chart.E. working time line.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Cash flow time line

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7. Costs that increase as a firm acquires additional current assets are called _____ costs. A. carryingB. shortageC. orderD. safetyE. trading


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Carrying costs

8. Costs that decrease as a firm acquires additional current assets are called _____ costs. A. carryingB. shortageC. debtD. equityE. payables


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Shortage costs

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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: A. pro forma income statement.B. sales projection.C. cash budget.D. receivables analysis.E. credit analysis.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash budget

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): A. floor loan.B. open loan.C. compensating balance.D. line of credit.E. bank note.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Line of credit

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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: A. compensating balance.B. secured credit deposit.C. letter of credit.D. line of credit.E. pledge.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Compensating balances

12. Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as: A. accounts receivable financing.B. pledged financing.C. capital funding.D. daily funding.E. capital financing.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Accounts receivable financing

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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): A. debenture.B. line of credit.C. banker's acceptance.D. working loan.E. inventory loan.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Inventory loan

14. Which one of the following increases cash? A. granting credit to a customerB. purchasing new machineryC. making a payment on a bank loanD. purchasing inventoryE. accepting credit from a supplier


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-4Section: 18.1Topic: Sources and uses of cash

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15. Which of the following are uses of cash?I. collecting a receivableII. increasing inventoryIII. obtaining a bank loanIV. paying a supplier for previous purchases A. I and III onlyB. II and IV onlyC. I and II onlyD. I, II, and IV onlyE. II, III, and IV only


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-4Section: 18.1Topic: Sources and uses of cash

16. Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. A. paying a supplier for a previous purchaseB. paying off a long-term debtC. selling inventory at costD. purchasing inventory on creditE. selling inventory at a profit on credit


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-4Section: 18.1Topic: Net working capital

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17. Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0. A. selling inventory at costB. collecting payment from a customerC. paying a payment on a long-term debtD. selling a fixed asset for book valueE. paying a supplier for the purchase of an inventory item


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-4Section: 18.1Topic: Net working capital

18. Which of the following are sources of cash?I. decrease in inventoryII. increase in accounts receivableIII. repayment of a bondIV. sale of preferred stock A. I and III onlyB. I and IV onlyC. II and III onlyD. I, II, and III onlyE. I, III, and IV only


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-4Section: 18.1Topic: Sources of cash

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19. Which of the following will increase the operating cycle?I. increasing the inventory turnover rateII. increasing the payables periodIII. decreasing the receivable turnover rateIV. decreasing the inventory level A. I onlyB. III onlyC. II and IV onlyD. I and IV onlyE. II and III only


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Operating cycle

20. Which one of the following equals the operating cycle? A. cash cycle plus accounts receivable periodB. inventory period plus the accounts receivable periodC. inventory period plus the accounts payable periodD. accounts payable period minus the cash cycleE. accounts payable period plus the accounts receivable period



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21. Which one of the following will decrease the operating cycle? A. decreasing the inventory turnover rateB. decreasing the accounts payable periodC. increasing the accounts receivable turnover rateD. increasing the accounts payable periodE. increasing the accounts receivable period


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Operating cycle

22. The operating cycle describes how a product: A. is priced.B. is sold.C. moves through the current asset accounts.D. moves through the production process.E. generates a profit.



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23. Which of the following determines the length of the operating cycle?I. cash cycleII. inventory periodIII. accounts payable periodIV. accounts receivable period A. I and III onlyB. II and IV onlyC. I, II, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV



24. Which of the following will increase the cash cycle, all else constant?I. increasing the inventory periodII. decreasing the accounts receivable turnover rateIII. increasing the accounts payable periodIV. decreasing the accounts receivable period A. I and II onlyB. III and IV onlyC. I and IV onlyD. I, II, and III onlyE. I, III, and IV only


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Cash cycle

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25. An increase in which one of the following will decrease the cash cycle, all else equal? A. payables turnoverB. days sales in inventoryC. operating cycleD. inventory turnover rateE. accounts receivable period



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: A. increase the operating cycle.B. lengthen the accounts receivable period.C. shorten the accounts payable period.D. decrease the cash cycle.E. decrease the inventory turnover rate.



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27. Which of the following statements 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. A. I onlyB. III and IV onlyC. I and III onlyD. I and IV onlyE. I, II, and III only



28. Which one of the following statements is correct concerning the cash cycle? A. The longer the cash cycle, the more likely a firm will need external financing.B. Increasing the accounts payable period increases the cash cycle.C. A positive cash cycle is preferable to a negative cash cycle.D. The cash cycle can exceed the operating cycle if the payables period is equal to zero.E. Offering early payment discounts to customers will tend to increase the cash cycle.



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29. Which of the following actions will tend to decrease the inventory period?I. discontinuing all slow-selling merchandiseII. selling obsolete inventory below cost just to get rid of itIII. buying raw materials only as needed for the manufacturing processIV. producing goods on demand versus for inventory A. I and III onlyB. II and IV onlyC. II, III, and IV onlyD. I, II, and III onlyE. I, II, III, and IV


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Inventory period

30. Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days. A. tightening the standards for granting credit to customersB. refusing to grant additional credit to any customer who pays lateC. increasing the finance charges applied to all customer balances outstanding over thirty daysD. granting discounts for cash salesE. eliminating the discount for early payment by credit customers


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts receivable period

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31. An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? A. bad debtsB. accounts receivable turnover rateC. accounts receivable periodD. credit salesE. operating cycle


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts receivable period

32. If you pay your suppliers five days sooner, then: A. your payables turnover rate will decrease.B. you may require additional funds from other sources to fund the cash cycle.C. the cash cycle will decrease.D. your operating cycle will increase.E. the accounts receivable period will decrease.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts payable period

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33. Which one of the following will increase the accounts payable period, all else constant? A. an increase in the cost of goods sold account valueB. an increase in the ending accounts payable balanceC. an increase in the cash cycleD. a decrease in the operating cycleE. an increase in the accounts payable turnover rate


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts payable period

34. Which one of the following managers determines which customers must pay cash and which can charge their purchases? A. purchasing managerB. credit managerC. controllerD. production managerE. payables manager


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Organizational chart

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35. Which one of the following managers determines when a supplier will be paid? A. controllerB. payables managerC. credit managerD. purchasing managerE. production manager


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Organizational chart

36. A firm with a flexible short-term financial policy will: A. maintain a low balance in accounts receivables.B. only have minimal amounts, if any, invested in marketable securities.C. invest heavily in inventory.D. have low cash balances.E. have tight restrictions on granting credit to customers.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Short-term financial policy

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37. Which one of the following is indicative of a short-term restrictive financial policy? A. purchasing inventory on an as-needed basisB. granting credit to all customersC. investing heavily in marketable securitiesD. maintaining a large accounts receivable balanceE. keeping inventory levels high



38. Which of the following are associated with a restrictive short-term financial policy?I. little, if any, investment in marketable securitiesII. liberal credit terms for customersIII. low cash balancesIV. increasing inventory levels A. I and III onlyB. II and IV onlyC. I and IV onlyD. III and IV onlyE. I, II, and III only



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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 outsII. greater inventory selectionIII. decreased sales due to the new accounts receivable credit policyIV. decreased investment in marketable securities A. I and II onlyB. II and IV onlyC. I, II, and IV onlyD. I, III, and IV onlyE. I, II, III, and IV



40. A flexible short-term financial policy: A. increases a firm's need for long-term financing.B. minimizes net working capital.C. avoids bad debts by only selling items for cash.D. maximizes fixed assets and minimizes current assets.E. is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs.



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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. A. I and IV onlyB. II and III onlyC. I, II, and III onlyD. II, III, and IV onlyE. I, III, and IV only



42. Shortage costs include which of the following?I. disruption of production schedulesII. inventory ordering costsIII. lost customer goodwillIV. brokerage costs A. I and II onlyB. II and III onlyC. II, III, and IV onlyD. I, II, and III onlyE. I, II, III, and IV


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Shortage costs

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43. The optimal investment in current assets for an operating firm occurs at the point where: A. both shortage costs and carrying costs equal zero.B. shortage costs are equal to zero.C. carrying costs are equal to zero.D. carrying costs exceed shortage costs.E. the total costs of holding current assets is minimized.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Optimal point

44. Which one of the following statements is correct? A. A firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets.B. A firm with a flexible financing policy frequently invests in marketable securities.C. A firm with a flexible financing policy tends to use short-term financing on a frequent basis.D. Firms tend to avoid short-term financing under both restrictive and flexible financing policies.E. Firms with seasonal sales select flexible financing policies.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Asset financing policies

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45. Which one of the following statements is correct? A. Seasonal needs are financed externally when firms adhere to a flexible financing policy.B. A flexible financing policy tends to increase the risk of encountering financial distress.C. Long-term interest rates tend to be less volatile than short-term rates.D. Most firms tend to finance inventory with long-term debt.E. Short-term interest rates are generally higher than long-term rates.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Financing policies

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? A. October, November, and DecemberB. November, December, and JanuaryC. December, January, and FebruaryD. January, February, and MarchE. February, March, and April


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash collections

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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: A. 60 percent of February sales.B. 15 percent of April sales.C. 60 percent of March sales.D. 15 percent of March sales.E. 25 percent of February sales.



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: A. the first quarter.B. the second quarter.C. the third quarter.D. the fourth quarter.E. any quarter with equal probabilities of occurrence.



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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? A. Inventory purchases will be highest during the months of July and August.B. Inventory purchases will be highest during the months of May and June.C. Payments to suppliers will be highest during the months of June and July.D. Payments to suppliers will be highest during the months of July and August.E. Payments to suppliers will be highest during the months of August and September.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash disbursements

50. Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound?I. fixed expensesII. fixed asset purchasesIII. flexible financing policyIV. highly seasonal sales A. I and III onlyB. II and IV onlyC. III and IV onlyD. I, II, and III onlyE. II, III, and IV only


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash-out

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51. Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times.B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance.C. On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance.D. A cumulative cash deficit indicates a borrowing need.E. The ending cash balance must equal the minimum desired cash balance.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash balance

52. A cumulative cash deficit indicates a firm: A. has at least a short-term need for external funding.B. is facing long-term financial distress.C. will go out of business within the year.D. is capable of funding all of its needs internally.E. is using its cash wisely.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash balance

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53. The most common means of financing a temporary cash deficit is a: A. long-term secured bank loan.B. short-term secured bank loan.C. short-term issue of corporate bonds.D. long-term unsecured bank loan.E. short-term unsecured bank loan.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Short-term borrowing

54. The primary difference between a line of credit and a revolving credit arrangement is the: A. type of collateral used to secure the loan.B. length of the credit period.C. fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured.D. fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured.E. classification as either a committed or a noncommitted loan.



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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. A. I and III onlyB. II and IV onlyC. II and III onlyD. I and IV onlyE. II, III, and IV only



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? A. HPH will immediately receive $165,000 and will have no further obligation related to these receivables.B. HPH will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables.C. Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays HPH a discounted value for its receivables.D. Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays HPH a discounted price for the accounts collected after the normal collection period has elapsed.E. HPH receives the full amount of its receivables upon assignment but must reimburse Cross Town Bank for any uncollected account.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Short-term borrowing

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57. Which one of the following statements is correct? A. The assignment of receivables involves selling the firm's accounts receivables at full price.B. Lines of credit frequently require a cleanup period.C. With maturity factoring, the borrower receives the loan amount immediately.D. Commercial paper is short-term financing offered to highly-rated corporations by major banks.E. Credit card receivables funding is a relatively inexpensive method of borrowing on a short-term basis.



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


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 18-3Section: 18.6Topic: Short-term financial plan

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59. Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length of the inventory period? A. 19.21 daysB. 20.89 daysC. 26.72 daysD. 30.53 daysE. 33.69 days

Inventory turnover = $601,000/[($41,000 + $47,000)/2] = 13.65909Inventory period = 365/13.65909 = 26.72 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: 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? A. 12.26 timesB. 12.78 timesC. 14.22 timesD. 18.56 timesE. 19.70 times

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

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Inventory turnover

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61. North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 72 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? A. 11.24 daysB. 12.30 daysC. 16.48 daysD. 26.35 daysE. 29.68 days

Inventory turnover = ($948,000 0.72)/$23,000 = 29.6765Inventory period = 365/29.6765 = 12.30 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Inventory period

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? A. 17.26 daysB. 17.78 daysC. 18.58 daysD. 20.44 daysE. 29.77 days

Receivables turnover = $811,000/[($41,000 + $38,000)/2] = 20.53165Receivables period = 365/20.53165 = 17.78 Days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts receivable period

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63. The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts receivable of $9,800, and average accounts payable of $12,600. How long does it take for the firm's credit customers to pay for their purchases? A. 7.67 daysB. 8.78 daysC. 9.24 daysD. 11.88 daysE. 13.81 days

Receivables turnover = $387,000/$9,800 = 39.4898Receivables period = 365/39.4898 = 9.24 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts receivable period

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? A. 21.76 daysB. 22.38 daysC. 24.90 daysD. 25.89 daysE. 26.67 days

Payables turnover = ($512,000 0.71)/$24,800 = 14.6581Payables period = 365/14.6581 = 24.90 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts payable period

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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 $442,000. What is the payables turnover rate? A. 7.86 timesB. 8.39 timesC. 9.02 timesD. 9.86 timesE. 10.85 times

Payables turnover = $442,000/[($57,300 + $55,100)/2)] = 7.86 times

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Accounts payable turnover

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? A. 45.06 daysB. 45.28 daysC. 45.63 daysD. 53.13 daysE. 53.78 days

Inventory period = 365/14 = 26.07 daysAccounts receivable period = 365/19 = 19.21 daysOperating cycle = 26.07 + 19.21 days = 45.28 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Operating cycle

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67. Merryl Enterprises currently has an operating cycle of 62 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? A. 51 daysB. 57 daysC. 59 daysD. 60 daysE. 65 days

Operating cycle = 62 + 2 - 5 = 59 days


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? A. 31 daysB. 38 daysC. 45 daysD. 56 daysE. 62 days

Operating cycle = 27 + 4 = 31 days


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69. Interior Designs has an inventory period of 46 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. A. 52B. 62C. 71D. 78E. 91

Original operating cycle = 46 + 32 = 78 days; The operating cycle will not change as the accounts payable period does not affect the operating cycle, only the cash cycle.


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? A. 3.00 daysB. 5.28 daysC. 26.28 daysD. 71.00 daysE. 73.28 days

Cash cycle = (365/18) + 53 - 68 = 5.28 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-1Section: 18.2Topic: Cash cycle

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71. West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? A. 5.67 daysB. 25.63 daysC. 41.00 daysD. 52.00 daysE. 58.81 days

Cash cycle = (365/16) + 36 - (365/11) = 25.63 days


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? A. 22 daysB. 23 daysC. 29 daysD. 30 daysE. 31 days

Cash cycle = 31 - 2 - 3 + 4 = 30 days


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73. A company currently has a 48 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? A. 42 daysB. 43 daysC. 45 daysD. 47 daysE. 49 days

Cash cycle = 48 - 2 + 3 - 4 = 45 days


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. A. The firm will collect $800 in Quarter 2.B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.C. The firm will collect $2,000 in Quarter 3.D. The firm will have an accounts receivable balance of $2,300 at the end of the year.E. The firm will collect a total of $2,400 in Quarter 4.

Q4 collections = 45/90 ($2,500) + 45/90 ($2,300) = $2,400

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash collections

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75. Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Sales for February through May are $720, $760, $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. A. $720B. $760C. $790D. $820E. $850

In April, the firm would collect March sales of $760.


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. A. $420B. $426C. $440D. $450E. $482

March ending receivables = (28/30) $450 = $420

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Accounts receivable balance

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77. The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales for January through April are $440, $460, $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. A. $410B. $440C. $460D. $690E. $720

April collections = February sales = $460


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. A. $3,400B. $3,550C. $6,950D. $7,100E. $7,650

A/R Begin Q3 = A/R End Q2 = (45/90) $7,100 = $3,550

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Accounts receivable balance

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79. The Dog House expects sales of $560, $650, $670, 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? A. $621B. $628C. $633D. $639E. $643

August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643


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?

A. $20,500B. $21,725C. $24,250D. $26,000E. $26,675

Q2 disbursements = [(45/90) (0.55) $36,000] + [(45/90) (0.55) $43,000] = $21,725

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash disbursements

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81. Nadine's Boutique has a 30 day accounts payable period. The firm has expected quarterly sales of $1,100, $1,400, $1,700, 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. A. $1,195B. $1,208C. $1,247D. $1,337E. $1,380

Disbursement = [(30/90) (0.68 $1,700)] + [(60/90) (0.68 $2,100)] = $1,337

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash disbursements

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? A. The February payments to suppliers are $2,992.B. The March collections are $3,700.C. The accounts receivable balance at the end of March is $4,400.D. The purchases for February are $3,168.E. The accounts payable balance at the end of January is $5,832.

January ending A/P balance = 0.72($3,700) + 0.72($4,400) = $5,832

AACSB: AnalyticBloom's: ApplicationDifficulty: IntermediateLearning Objective: 18-3Section: 18.4Topic: Accounts payable balance

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83. As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. During the quarter, the company collected $520 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? A. -$110B. $320C. $350D. $430E. $490

Cash balance = $460 + $520 - $360 - $20 - $110 - $140 = $350

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.4Topic: Cash balance

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? A. $145B. $155C. $205D. $215E. $265

Cash balance = $175 - $110 - $290 + $430 = $205


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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 $160. What is the projected ending cash balance at the end of March? Assume every month has 30 days. A. $258B. $461C. $507D. $567E. $621

March collections = (10/30) $610 + (20/30) $680 = $657March disbursements for payables = 0.70 ($680) = $476March ending cash balance = $440 + $657 - $476 - $160 = $461


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? A. 7.37 percentB. 7.43 percentC. 7.56 percentD. 8.17 percentE. 8.33 percent

Amount borrowed = $75,000/(1 - 0.05) = $78,947.37Annual interest = $78,947.37 0.07 = $5,526.32Effective interest rate = $5,526.32/$75,000 = 7.37 percent

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Interest rate with compensating balance

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87. Juno Industrial Supply has a $150,000 line of credit with a 6.5 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? A. 6.42 percentB. 6.47 percentC. 6.50 percentD. 6.58 percentE. 6.63 percent


AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Interest rate with compensating balance

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? A. 7.76 percentB. 8.00 percentC. 8.17 percentD. 8.33 percentE. 8.42 percent


AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Effective interest with compensating balance

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89. The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 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? A. 17.61 percentB. 18.20 percentC. 18.36 percentD. 18.78 percentE. 19.04 percent

Interest rate for 34 days = 0.015/(1 - 0.015) = 0.015228Number of periods per year = 365/34 = 10.735294Effective annual rate = 1.01522810.735294 - 1 = 17.61 percent

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Accounts receivable factoring

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. A. 4.76 percentB. 4.80 percentC. 4.89 percentD. 7.00 percentE. 7.27 percent

Effective annual interest = (1.012)4 - 1 = 4.89 percent

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Rate on unused credit line

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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 1.4 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. A. 5.72 percentB. 5.76 percentC. 6.00 percentD. 6.08 percentE. 6.14 percent


AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Rate on unused credit line

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. A. 2.00 percentB. 2.43 percentC. 3.18 percentD. 7.00 percentE. 7.19 percent


AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Rate on unused line of credit

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93. New Town Bank offers you a $40,000 line of credit with an interest rate of 1.85 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. A. 4.47 percentB. 4.58 percentC. 7.61 percentD. 7.78 percentE. 12.33 percent


AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.5Topic: Short-term borrowing

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? A. $0B. $28C. $126D. $154E. $280

Cash deficit = $1,126 - $280 - $1,000 = -$154The firm needs to borrow $154.

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.6Topic: Minimum cash balance

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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 $800 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? A. borrow $16B. borrow $128C. borrow $144D. repay $128E. repay $144

Cash surplus = $784 + $3,918 - $3,774 - $800 = $128.The firm will repay $128 this quarter.

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.6Topic: Short-term financial plan

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? A. $151B. $170C. $176D. $189E. $193

Loan balance = $274 + $19 - $123 = $170

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 18-3Section: 18.6Topic: Short-term financial plan

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Essay Questions

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

The three types are blanket lien, trust receipts, and field warehouse financing. The blanket lien is certainly the easiest for the firm since the lender places a lien on the firm's entire inventory. Generally, the borrower does not have to provide any details on the inventory items. Trust receipt financing requires the borrower and lender to specify the exact inventory item which secures each advance. This can be a time-consuming and cumbersome type of financing for the firm. Field warehouse financing requires that an independent company supervise the collateral for the lender. This, too, can be a cumbersome type of financing.

Feedback: Refer to section 18.5

AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: BasicLearning Objective: 18-3Section: 18.5Topic: Secured inventory loans

98. 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.

Students should replicate graphs A and B in Figure 18.2 in the text.


AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: BasicLearning Objective: 18-2Section: 18.3Topic: Financing policies

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99. 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?

In this situation, firms will tend to prefer short-term debt over long-term debt and thus will tend to opt for a restrictive financing policy.


AACSB: Reflective thinkingBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-2Section: 18.3Topic: Financing policies

100. 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?

Revolvers are flexible lending arrangements which make it convenient for firms to borrow funds on short notice for short periods of time. This is particularly applicable to firms that adhere to a restrictive financing policy. Furthermore, since the compensating balance is typically required only if the borrower draws on the line, the cost is incurred only while loans are outstanding. Alternative types of financing include letters of credit, accounts receivable financing, inventory loans, commercial paper, and trade credit.


AACSB: Reflective thinkingBloom's: AnalysisDifficulty: IntermediateLearning Objective: 18-3Section: 18.4Topic: Compensating balances

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101. Details Corp. has a book net worth of $8,150. Long-term debt is $1,650. Net working capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the company have? A. $4,250B. $4,550C. $5,150D. $5,650E. $6,750

Cash = $8,150 + $1,650 - $2,150 - $2,000 = $5,650

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-2Learning Objective: 18-3Section: 18.1Topic: Cash equation

102. 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? A. $375B. $450C. $500D. $600E. $700

A/R Q3 end = (60/90) $750 = $500

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-5Learning Objective: 18-3Section: 18.3Topic: Accounts receivable balance

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

How long is the cash cycle? A. 36.6 daysB. 37.2 daysC. 41.0 daysD. 41.4 daysE. 42.8 days

Inventory turnover = $58,638/[($9,338 + $11,442)/2] = 5.6437 timesInventory period = 365/5.6437 = 64.67 daysReceivables turnover = $91,544/[($5,670 + $6,947)/2] = 14.5112 timesReceivables period = 365/14.5112 = 25.15 daysPayables turnover = $58,638/[($7,689 + $9,421)/2] = 6.8542 timesPayables period = 365/6.8542 = 53.25 daysCash cycle = 64.67 + 25.15 - 53.25 = 36.6 days

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-6Learning Objective: 18-1Section: 18.2Topic: Cash cycle

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104. 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? A. 28.79 percentB. 36.20 percentC. 37.78 percentD. 40.97 percentE. 42.58 percent

Number of periods = 365/42 = 8.6905EAR = {1 + [0.04/(1 - 0.04)]8.6905 - 1 = 42.58 percent

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-7Learning Objective: 18-3Section: 18.5Topic: Factoring receivables

105. 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 29 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? A. $212.67B. $224.33C. $241.67D. $251.33E. $256.67

Q2 payments = (60/90) 0.29 $800 + (30/90) 0.29 $900 = $241.67

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-8Learning Objective: 18-3Section: 18.4Topic: Payments

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106. 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? A. $564.27B. $579.43C. $582.15D. $585.30E. $590.67

Payment of accounts = (60/90) 0.65 $660 + (30/90) 0.65 $590 = $413.83Total disbursements = $413.83 + (0.16 $660) + $60 = $579.43

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-9Learning Objective: 18-3Section: 18.4Topic: Payments

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107. The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009:

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? A. $112,400.00B. $112,408.16C. $115,703.03D. $122,356.33E. $125,400.00

January collections = 0.67 $120,000 + (0.23/0.33) $32,000 + $45,000 - $32,000 = $115,703.03

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-10Learning Objective: 18-3Section: 18.4Topic: Cash collections

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108. Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:

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 2009, 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? A. $348,887B. $366,846C. $414,141D. $457,777E. $477,374

April cash balance = $403,200 + (0.36 $547,200) + (0.61 $302,400) - $224,640 - $57,240 - $16,410 - $119,520 = $366,846May cash balance = $366,846 + (0.36 $570,240) + (0.61 $547,200) - $211,680 - $69,420 - $16,410 - $131,040 = $477,374

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-11Learning Objective: 18-3Section: 18.4Topic: Cash budget

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109. 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, 5 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? A. 6.50 percentB. 6.62 percentC. 6.81 percentD. 6.87 percentE. 6.94 percent

Monthly interest = $50,000,000 (0.005) = $250,000Amount received = (1 - 0.05) $50,000,000 = $47,500,000Periodic interest = $250,000/$47,500,000 = 0.005263EAR = (1 + 0.005263)12 - 1 = 6.50 percent

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-13Learning Objective: 18-3Section: 18.5Topic: Cost of borrowing

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110. 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? A. 0 percentB. 5.0 percentC. 5.2 percentD. 5.3 percentE. 5.5 percent

EAR = (1 + 0.013)4 - 1 = 5.30 percent

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 18-14Learning Objective: 18-3Section: 18.5Topic: Cost of borrowing

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Chap018

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