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Chapter 18 - Short-Term Finance and Planning

Chapter 18 Short-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 !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle.

%. The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle.

&. The length of time between the sale of inventory and the collection of the payment for that sale is called the !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle.

'. 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 !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle.

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Chapter 18 - Short-Term Finance and Planning

(. 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 !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle.

). ! graphical representation of the operating and cash cycles is called a*n+ !. operating chart. ". cash flow time line. C. production flow line. #. component chart. $. wor,ing time line.

-. Costs that increase as a firm ac.uires additional current assets are called ///// costs. !. carrying ". shortage C. order #. safety $. trading

8. Costs that decrease as a firm ac.uires additional current assets are called ///// costs. !. carrying ". shortage C. debt #. e.uity $. payables

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Chapter 18 - Short-Term Finance and Planning

0. Steve has estimated the cash inflows and outflows for his hardware store for ne1t year. The report that he has prepared recapping these cash flows is called a !. pro forma income statement. ". sales pro2ection. C. cash budget. #. receivables analysis. $. credit analysis.

13. Taylor Supply has made an agreement with its ban, that it can borrow up to 4135333 at any time over the ne1t year. This arrangement is called a*n+ !. floor loan. ". open loan. C. compensating balance. #. line of credit. $. ban, note.

11. 6oney deposited by a borrower with the ban, in a low or non-interest-bearing account as a condition of a loan agreement is called a !. compensating balance. ". secured credit deposit. C. letter of credit. #. line of credit. $. pledge.

1%. "rustle7s Pottery either factors or assigns all of its receivables to other firms. This is ,nown as !. accounts receivable financing. ". pledged financing. C. capital funding. #. daily funding. $. capital financing.

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Chapter 18 - Short-Term Finance and Planning

1&. 8ose7s 9ift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an e1ample of a*n+ !. debenture. ". line of credit. C. ban,er7s acceptance. #. wor,ing loan. $. inventory loan.

1'. :hich one of the following increases cash; !. granting credit to a customer ". purchasing new machinery C. ma,ing a payment on a ban, loan #. purchasing inventory $. accepting credit from a supplier

1(. :hich of the following are uses of cash; <. collecting a receivable <<. increasing inventory <<<. obtaining a ban, loan <=. paying a supplier for previous purchases !. < and <<< only ". << and <= only C. < and << only #. <5 <<5 and <= only $. <<5 <<<5 and <= only

1). :hich one of the following will increase net wor,ing capital; !ssume the current ratio is greater than 1.3. !. paying a supplier for a previous purchase ". paying off a long-term debt C. selling inventory at cost #. purchasing inventory on credit $. selling inventory at a profit on credit

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Chapter 18 - Short-Term Finance and Planning

1-. :hich one of the following will decrease the net wor,ing capital of a firm; !ssume the current ratio is greater than 1.3. !. selling inventory at cost ". collecting payment from a customer C. paying a payment on a long-term debt #. selling a fi1ed asset for boo, value $. paying a supplier for the purchase of an inventory item

18. :hich of the following are sources of cash; <. decrease in inventory <<. increase in accounts receivable <<<. repayment of a bond <=. sale of preferred stoc, !. < and <<< only ". < and <= only C. << and <<< only #. <5 <<5 and <<< only $. <5 <<<5 and <= only

10. :hich of the following will increase the operating cycle; <. increasing the inventory turnover rate <<. increasing the payables period <<<. decreasing the receivable turnover rate <=. decreasing the inventory level !. < only ". <<< only C. << and <= only #. < and <= only $. << and <<< only

%3. :hich one of the following e.uals the operating cycle; !. cash cycle plus accounts receivable period ". inventory period plus the accounts receivable period C. inventory period plus the accounts payable period #. accounts payable period minus the cash cycle $. accounts payable period plus the accounts receivable period

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Chapter 18 - Short-Term Finance and Planning

%1. :hich one of the following will decrease the operating cycle; !. decreasing the inventory turnover rate ". decreasing the accounts payable period C. increasing the accounts receivable turnover rate #. increasing the accounts payable period $. increasing the accounts receivable period

%%. The operating cycle describes how a product !. is priced. ". is sold. C. moves through the current asset accounts. #. moves through the production process. $. generates a profit.

%&. :hich of the following determines the length of the operating cycle; <. cash cycle <<. inventory period <<<. accounts payable period <=. accounts receivable period !. < and <<< only ". << and <= only C. <5 <<5 and <= only #. <<5 <<<5 and <= only $. <5 <<5 <<<5 and <=

%'. :hich of the following will increase the cash cycle5 all else constant; <. increasing the inventory period <<. decreasing the accounts receivable turnover rate <<<. increasing the accounts payable period <=. decreasing the accounts receivable period !. < and << only ". <<< and <= only C. < and <= only #. <5 <<5 and <<< only $. <5 <<<5 and <= only

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Chapter 18 - Short-Term Finance and Planning

%(. !n increase in which one of the following will decrease the cash cycle5 all else e.ual; !. payables turnover ". days sales in inventory C. operating cycle #. inventory turnover rate $. accounts receivable period

%). 6etal #esigns5 <nc.5 historically produced products for inventory. >ow5 the firm only produces a product when it receives an actual order from a customer. !ll else e.ual5 this change will !. increase the operating cycle. ". lengthen the accounts receivable period. C. shorten the accounts payable period. #. decrease the cash cycle. $. decrease the inventory turnover rate.

%-. :hich of the following statements are correct; <. !n increase in the accounts payable period shortens the cash cycle. <<. The cash cycle is e.ual to the operating cycle minus the inventory period. <<<. ! negative cash cycle is preferable to a positive cash cycle. <=. The cash cycle plus the accounts receivable period is e.ual to the operating cycle. !. < only ". <<< and <= only C. < and <<< only #. < and <= only $. <5 <<5 and <<< only

%8. :hich one of the following statements is correct concerning the cash cycle; !. The longer the cash cycle5 the more li,ely a firm will need e1ternal financing. ". <ncreasing the accounts payable period increases the cash cycle. C. ! positive cash cycle is preferable to a negative cash cycle. #. The cash cycle can e1ceed the operating cycle if the payables period is e.ual to ?ero. $. @ffering early payment discounts to customers will tend to increase the cash cycle.

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Chapter 18 - Short-Term Finance and Planning

%0. :hich of the following actions will tend to decrease the inventory period; <. discontinuing all slow-selling merchandise <<. selling obsolete inventory below cost 2ust to get rid of it <<<. buying raw materials only as needed for the manufacturing process <=. producing goods on demand versus for inventory !. < and <<< only ". << and <= only C. <<5 <<<5 and <= only #. <5 <<5 and <<< only $. <5 <<5 <<<5 and <=

&3. :hich one of the following actions will tend to increase the accounts receivable period; !ssume the accounts receivable period is currently &' days. !. tightening the standards for granting credit to customers ". refusing to grant additional credit to any customer who pays late C. increasing the finance charges applied to all customer balances outstanding over thirty days #. granting discounts for cash sales $. eliminating the discount for early payment by credit customers

&1. !n increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive; !. bad debts ". accounts receivable turnover rate C. accounts receivable period #. credit sales $. operating cycle

&%. <f you pay your suppliers five days sooner5 then !. your payables turnover rate will decrease. ". you may re.uire additional funds from other sources to fund the cash cycle. C. the cash cycle will decrease. #. your operating cycle will increase. $. the accounts receivable period will decrease.

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Chapter 18 - Short-Term Finance and Planning

&&. :hich one of the following will increase the accounts payable period5 all else constant; !. an increase in the cost of goods sold account value ". an increase in the ending accounts payable balance C. an increase in the cash cycle #. a decrease in the operating cycle $. an increase in the accounts payable turnover rate

&'. :hich one of the following managers determines which customers must pay cash and which can charge their purchases; !. purchasing manager ". credit manager C. controller #. production manager $. payables manager

&(. :hich one of the following managers determines when a supplier will be paid; !. controller ". payables manager C. credit manager #. purchasing manager $. production manager

&). ! firm with a fle1ible short-term financial policy will !. maintain a low balance in accounts receivables. ". only have minimal amounts5 if any5 invested in mar,etable securities. C. invest heavily in inventory. #. have low cash balances. $. have tight restrictions on granting credit to customers.

&-. :hich one of the following is indicative of a short-term restrictive financial policy; !. purchasing inventory on an as-needed basis ". granting credit to all customers C. investing heavily in mar,etable securities #. maintaining a large accounts receivable balance $. ,eeping inventory levels high

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Chapter 18 - Short-Term Finance and Planning

&8. :hich of the following are associated with a restrictive short-term financial policy; <. little5 if any5 investment in mar,etable securities <<. liberal credit terms for customers <<<. low cash balances <=. increasing inventory levels !. < and <<< only ". << and <= only C. < and <= only #. <<< and <= only $. <5 <<5 and <<< only

&0. The Aumber 6art recently replaced its management team. !s a result5 the firm is implementing a restrictive short-term policy in place of the fle1ible policy under which the firm had been operating. :hich of the following should the employees e1pect as a result of this policy change; <. reduction in sales due to stoc, outs <<. greater inventory selection <<<. decreased sales due to the new accounts receivable credit policy <=. decreased investment in mar,etable securities !. < and << only ". << and <= only C. <5 <<5 and <= only #. <5 <<<5 and <= only $. <5 <<5 <<<5 and <=

'3. ! fle1ible short-term financial policy !. increases a firm7s need for long-term financing. ". minimi?es net wor,ing capital. C. avoids bad debts by only selling items for cash. #. ma1imi?es fi1ed assets and minimi?es current assets. $. is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs.

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Chapter 18 - Short-Term Finance and Planning

'1. ! fle1ible short-term financial policy <. increases shortage costs due to fre.uent cash-outs. <<. tends to increase sales as compared to a restrictive policy. <<<. re.uires a si?eable investment in current assets. <=. incurs more carrying costs than a restrictive policy. !. < and <= only ". << and <<< only C. <5 <<5 and <<< only #. <<5 <<<5 and <= only $. <5 <<<5 and <= only

'%. Shortage costs include which of the following; <. disruption of production schedules <<. inventory ordering costs <<<. lost customer goodwill <=. bro,erage costs !. < and << only ". << and <<< only C. <<5 <<<5 and <= only #. <5 <<5 and <<< only $. <5 <<5 <<<5 and <=

'&. The optimal investment in current assets for an operating firm occurs at the point where !. both shortage costs and carrying costs e.ual ?ero. ". shortage costs are e.ual to ?ero. C. carrying costs are e.ual to ?ero. #. carrying costs e1ceed shortage costs. $. the total costs of holding current assets is minimi?ed.

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Chapter 18 - Short-Term Finance and Planning

''. :hich one of the following statements is correct; !. ! firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets. ". ! firm with a fle1ible financing policy fre.uently invests in mar,etable securities. C. ! firm with a fle1ible financing policy tends to use short-term financing on a fre.uent basis. #. Firms tend to avoid short-term financing under both restrictive and fle1ible financing policies. $. Firms with seasonal sales select fle1ible financing policies.

'(. :hich one of the following statements is correct; !. Seasonal needs are financed e1ternally when firms adhere to a fle1ible financing policy. ". ! fle1ible financing policy tends to increase the ris, of encountering financial distress. C. Aong-term interest rates tend to be less volatile than short-term rates. #. 6ost firms tend to finance inventory with long-term debt. $. Short-term interest rates are generally higher than long-term rates.

'). !ssume each month has &3 days and a firm has a )3-day accounts receivable period. #uring the second calendar .uarter of the year5 that firm will collect payment for the sales it made during which of the following months; !. @ctober5 >ovember5 and #ecember ". >ovember5 #ecember5 and Banuary C. #ecember5 Banuary5 and February #. Banuary5 February5 and 6arch $. February5 6arch5 and !pril

'-. The Carvester collects %( percent of sales in the month of sale5 )3 percent of sales in the month following the month of sale5 and 1( percent of sales in the second month following the month of sale. #uring the month of !pril5 the firm will collect !. )3 percent of February sales. ". 1( percent of !pril sales. C. )3 percent of 6arch sales. #. 1( percent of 6arch sales. $. %( percent of February sales.

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Chapter 18 - Short-Term Finance and Planning

'8. ! manufacturing firm has a 03 day collection period. The firm produces seasonal merchandise and thus has the least sales during the first .uarter of a year and the highest level of sales during the fourth .uarter of a year. The firm maintains a relatively steady level of production which means that its cash disbursements are fairly e.ual in all .uarters. The firm is most apt to face a cash-out situation in !. the first .uarter. ". the second .uarter. C. the third .uarter. #. the fourth .uarter. $. any .uarter with e.ual probabilities of occurrence.

'0. Bill is the CF@ of Summertime !dventures which is a seasonal firm speciali?ing in products related to water sports. The firm purchases inventory one month before it is sold and pays for its purchases )3 days after the invoice date. Sales are highest during Buly and !ugust. Currently5 Bill is preparing the cash disbursements section of the firm7s cash budget. :hich one of the following statements is supported by this information; !. <nventory purchases will be highest during the months of Buly and !ugust. ". <nventory purchases will be highest during the months of 6ay and Bune. C. Payments to suppliers will be highest during the months of Bune and Buly. #. Payments to suppliers will be highest during the months of Buly and !ugust. $. Payments to suppliers will be highest during the months of !ugust and September.

(3. :hich two of the following are most apt to cause a cash-out for a firm that is generally financially sound; <. fi1ed e1penses <<. fi1ed asset purchases <<<. fle1ible financing policy <=. highly seasonal sales !. < and <<< only ". << and <= only C. <<< and <= only #. <5 <<5 and <<< only $. <<5 <<<5 and <= only

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Chapter 18 - Short-Term Finance and Planning

(1. :hich one of the following statements is correct concerning the cash balance of a firm; !. 6ost firms attempt to maintain a ?ero cash balance at all times. ". The cumulative cash surplus shown on a cash budget is e.ual to the ending cash balance plus the minimum desired cash balance. C. @n a cash balance report5 the cumulative cash surplus at the end of 6ay is used as Bune7s beginning cash balance. #. ! cumulative cash deficit indicates a borrowing need. $. The ending cash balance must e.ual the minimum desired cash balance.

(%. ! cumulative cash deficit indicates a firm !. has at least a short-term need for e1ternal funding. ". is facing long-term financial distress. C. will go out of business within the year. #. is capable of funding all of its needs internally. $. is using its cash wisely.

(&. The most common means of financing a temporary cash deficit is a !. long-term secured ban, loan. ". short-term secured ban, loan. C. short-term issue of corporate bonds. #. long-term unsecured ban, loan. $. short-term unsecured ban, loan.

('. The primary difference between a line of credit and a revolving credit arrangement is the !. type of collateral used to secure the loan. ". length of the credit period. C. fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured. #. fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured. $. classification as either a committed or a noncommitted loan.

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Chapter 18 - Short-Term Finance and Planning

((. ! compensating balance <. is re.uired when a firm ac.uires any ban, financing other than a line of credit. <<. increases the cost of short-term ban, financing. <<<. may be re.uired even if a firm never borrows funds. <=. is often used as a means of paying for ban,ing services received. !. < and <<< only ". << and <= only C. << and <<< only #. < and <= only $. <<5 <<<5 and <= only

(). Cigh Point Cotel *CPC+ has 41)(5333 in accounts receivable. To finance a ma2or purchase5 the company assigns these receivables to Cross Town "an,. :hich one of the following statements correctly describes this transaction; !. CPC will immediately receive 41)(5333 and will have no further obligation related to these receivables. ". CPC will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables. C. Cross Town "an, accepts full responsibility for the collection of the accounts receivables and5 in e1change5 immediately pays CPC a discounted value for its receivables. #. Cross Town "an, accepts full responsibility for collecting the accounts receivables and pays CPC a discounted price for the accounts collected after the normal collection period has elapsed. $. CPC receives the full amount of its receivables upon assignment but must reimburse Cross Town "an, for any uncollected account.

(-. :hich one of the following statements is correct; !. The assignment of receivables involves selling the firm7s accounts receivables at full price. ". Aines of credit fre.uently re.uire a cleanup period. C. :ith maturity factoring5 the borrower receives the loan amount immediately. #. Commercial paper is short-term financing offered to highly-rated corporations by ma2or ban,s. $. Credit card receivables funding is a relatively ine1pensive method of borrowing on a shortterm basis.

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Chapter 18 - Short-Term Finance and Planning

(8. :hich of the following are benefits derived from short-term financial planning; <. having advance notice of when your firm will re.uire e1ternal financing <<. being able to determine the e1tent of time for which a loan is re.uired <<<. having the ability to time capital e1penditures in order to place the least financial burden possible on a firm <=. ,nowing for certain what your cash balance will be si1 months in advance !. < and <<< only ". <5 <<5 and <<< only C. <<5 <<<5 and <= only #. <5 <<5 and <= only $. <5 <<5 <<<5 and <=

(0. #enver <nteriors5 <nc.5 has sales of 48&)5333 and cost of goods sold of 4)315333. The firm had a beginning inventory of 4'15333 and an ending inventory of 4'-5333. :hat is the length of the inventory period; !. 10.%1 days ". %3.80 days C. %).-% days #. &3.(& days $. &&.)0 days

)3. ! national firm has sales of 4-%05333 and cost of goods sold of 4'-85333. !t the beginning of the year5 the inventory was 4&-5333. !t the end of the year5 the inventory balance was 4'15333. :hat is the inventory turnover rate; !. 1%.%) times ". 1%.-8 times C. 1'.%% times #. 18.() times $. 10.-3 times

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Chapter 18 - Short-Term Finance and Planning

)1. >orth Side :holesalers has sales of 40'85333. The cost of goods sold is e.ual to -% percent of sales. The firm has an average inventory of 4%&5333. Cow many days on average does it ta,e the firm to sell its inventory; !. 11.%' days ". 1%.&3 days C. 1).'8 days #. %).&( days $. %0.)8 days

)%. The "ear 8ug has sales of 48115333. The cost of goods sold is e.ual to )& percent of sales. The beginning accounts receivable balance is 4'15333 and the ending accounts receivable balance is 4&85333. Cow long on average does it ta,e the firm to collect its receivables; !. 1-.%) days ". 1-.-8 days C. 18.(8 days #. %3.'' days $. %0.-- days

)&. The "lue Star has sales of 4&8-53335 costs of goods sold of 4%(053335 average accounts receivable of 4058335 and average accounts payable of 41%5)33. Cow long does it ta,e for the firm7s credit customers to pay for their purchases; !. -.)- days ". 8.-8 days C. 0.%' days #. 11.88 days $. 1&.81 days

)'. The 6ountain Top Shoppe has sales of 4(1%53335 average accounts receivable of 4&15'33 and average accounts payable of 4%'5833. The cost of goods sold is e.uivalent to -1 percent of sales. Cow long does it ta,e The 6ountain Top Shoppe to pay its suppliers; !. %1.-) days ". %%.&8 days C. %'.03 days #. %(.80 days $. %).)- days

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Chapter 18 - Short-Term Finance and Planning

)(. C9 Aivery Supply had a beginning accounts payable balance of 4(-5&33 and an ending accounts payable balance of 4((5133. Sales for the period were 4)135333 and costs of goods sold were 4''%5333. :hat is the payables turnover rate; !. -.8) times ". 8.&0 times C. 0.3% times #. 0.8) times $. 13.8( times

)). Dour firm has an inventory turnover rate of 1'5 a payables turnover rate of 85 and a receivables turnover rate of 10. Cow long is your firm7s operating cycle; !. '(.3) days ". '(.%8 days C. '(.)& days #. (&.1& days $. (&.-8 days

)-. 6erryl $nterprises currently has an operating cycle of )% days. The firm is analy?ing some operational changes5 which are e1pected to increase the accounts receivable period by % days and decrease the inventory period by ( days. The accounts payable turnover rate is e1pected to increase from '% to ') times per year. <f all of these changes are adopted5 what will the firm7s new operating cycle be; !. (1 days ". (- days C. (0 days #. )3 days $. )( days

)8. @n average5 Furniture E 6ore is able to sell its inventory in %- days. The firm ta,es 8days on average to pay for its purchases. @n the other hand5 its average customer pays with a credit card which allows the firm to collect its receivables in ' days. 9iven this information5 what is the length of operating cycle; !. &1 days ". &8 days C. '( days #. () days $. )% days

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Chapter 18 - Short-Term Finance and Planning

)0. <nterior #esigns has an inventory period of ') days5 an accounts payable period of &8 days5 and an accounts receivable period of &% days. 6anagement is considering an offer from their suppliers to pay within 13 days and receive a % percent discount. <f the new discount is ta,en5 the accounts payable period is e1pected to decline by %) days. <f the new discount is ta,en5 the operating cycle will be ///// days. !. (% ". )% C. -1 #. -8 $. 01

-3. 6etal Products Co. has an inventory period of (& days5 an accounts payable period of )8 days5 and an accounts receivable turnover rate of 18. :hat is the length of the cash cycle; !. &.33 days ". (.%8 days C. %).%8 days #. -1.33 days $. -&.%8 days

-1. :est Chester !utomation has an inventory turnover of 1) and an accounts payable turnover of 11. The accounts receivable period is &) days. :hat is the length of the cash cycle; !. (.)- days ". %(.)& days C. '1.33 days #. (%.33 days $. (8.81 days

-%. Peterson7s !nti.uities currently has a &1 day cash cycle. !ssume the firm changes its operations such that it decreases its receivables period by % days5 decreases its inventory period by & days5 and decreases its payables period by ' days. :hat will the length of the cash cycle be after these changes; !. %% days ". %& days C. %0 days #. &3 days $. &1 days

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Chapter 18 - Short-Term Finance and Planning

-&. ! company currently has a '8 day cash cycle. !ssume the firm changes its operations such that it decreases its receivables period by % days5 increases its inventory period by & days5 and increases its payables period by ' days. :hat will the length of the cash cycle be after these changes; !. '% days ". '& days C. '( days #. '- days $. '0 days

-'. Tall 9uys Clothing has a '( day collection period. Sales for the ne1t calendar year are estimated at 4%51335 415)335 4%5(33 and 4%5&335 respectively5 by .uarter5 starting with the first .uarter of the year. 9iven this information5 which one of the following statements is correct; !ssume a year has &)3 days. !. The firm will collect 4833 in Fuarter %. ". The accounts receivable balance at the beginning of Fuarter ' will be 4151(3. C. The firm will collect 4%5333 in Fuarter &. #. The firm will have an accounts receivable balance of 4%5&33 at the end of the year. $. The firm will collect a total of 4%5'33 in Fuarter '.

-(. Forest 9ardens5 <nc.5 has a beginning receivables balance on February 1 of 4-&3. Sales for February through 6ay are 4-%35 4-)35 48%35 and 48(35 respectively. The accounts receivable period is &3 days. :hat is the amount of the !pril collections; !ssume a year has &)3 days. !. 4-%3 ". 4-)3 C. 4-03 #. 48%3 $. 48(3

-). #avis and #avis have e1pected sales of 4'035 4')(5 4'(35 and 4(-3 for the months of Banuary through !pril5 respectively. The accounts receivable period is %8 days. :hat is the accounts receivable balance at the end of 6arch; !ssume a year has &)3 days. !. 4'%3 ". 4'%) C. 4''3 #. 4'(3 $. 4'8%

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Chapter 18 - Short-Term Finance and Planning

--. The !thletic Sports Store has a beginning receivables balance on Banuary 1 of 4'13. Sales for Banuary through !pril are 4''35 4')35 4)035 and 4-%35 respectively. The accounts receivable period is )3 days. Cow much did the firm collect in the month of !pril; !ssume a year has &)3 days. !. 4'13 ". 4''3 C. 4')3 #. 4)03 $. 4-%3

-8. "rea,water !.uatics has a '( day accounts receivable period. The estimated .uarterly sales for this year5 starting with the first .uarter5 are 4)58335 4-51335 485%335 and 4)5'335 respectively. :hat is the accounts receivable balance at the beginning of the third .uarter; !ssume a year has &)3 days. !. 4&5'33 ". 4&5((3 C. 4)50(3 #. 4-5133 $. 4-5)(3

-0. The #og Couse e1pects sales of 4()35 4)(35 4)-35 and 4)13 for the months of 6ay through !ugust5 respectively. The firm collects %3 percent of sales in the month of sale5 -3 percent in the month following the month of sale5 and 8 percent in the second month following the month of sale. The remaining % percent of sales is never collected. Cow much money does the firm e1pect to collect in the month of !ugust; !. 4)%1 ". 4)%8 C. 4)&& #. 4)&0 $. 4)'&

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Chapter 18 - Short-Term Finance and Planning

83. The :ire Couse purchases its inventory one .uarter prior to the .uarter of sale. The purchase price is (( percent of the sales price. The accounts payable period is '( days. The accounts payable balance at the beginning of .uarter one is 4)%5333. :hat is the amount of the e1pected disbursements for .uarter two given the following e1pected .uarterly sales;

!. 4%35(33 ". 4%15-%( C. 4%'5%(3 #. 4%)5333 $. 4%)5)-(

81. >adine7s "outi.ue has a &3 day accounts payable period. The firm has e1pected .uarterly sales of 4151335 415'335 415-335 and 4%51335 respectively5 for ne1t year. The .uarterly cost of goods sold is e.ual to )8 percent of the ne1t .uarter7s sales. The firm has a beginning accounts payable balance of 4((3 as of Fuarter 1. :hat is the amount of the pro2ected cash disbursements for accounts payable for Fuarter & of the ne1t year; !ssume a year has &)3 days. !. 41510( ". 415%38 C. 415%'#. 415&&$. 415&83

8%. Gid7s #elight e1pects to sell 485%33 worth of toys in #ecember5 4&5-33 worth in Banuary5 4'5'33 in February5 and 4)5133 in 6arch. The wholesale cost is -% percent of the retail price. The firm has a receivables period of &3 days5 a payables period of )3 days5 and buys inventory one month prior to selling it. :hich one of the following statements is correct; !. The February payments to suppliers are 4%500%. ". The 6arch collections are 4&5-33. C. The accounts receivable balance at the end of 6arch is 4'5'33. #. The purchases for February are 4&51)8. $. The accounts payable balance at the end of Banuary is 4(58&%.

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Chapter 18 - Short-Term Finance and Planning

8&. !s of the beginning of the .uarter5 Swenson7s5 <nc. had a cash balance of 4')3. #uring the .uarter5 the company collected 4(%3 from customers and paid suppliers 4&)3. The company also paid an interest payment of 4%3 and a ta1 payment of 4113. <n addition5 the company repaid 41'3 on its long-term debt. :hat is Callahan7s cash balance at the end of the .uarter; !. -4113 ". 4&%3 C. 4&(3 #. 4'&3 $. 4'03

8'. @n 6ay 15 your firm had a beginning cash balance of 41-(. Dour sales for !pril were 4'&3 and your 6ay sales were 4'83. #uring 6ay5 you had cash e1penses of 4113 and payments on your accounts payable of 4%03. Dour accounts receivable period is &3 days. :hat is your firm7s beginning cash balance on Bune 1; !. 41'( ". 41(( C. 4%3( #. 4%1( $. 4%)(

8(. The 6ish 6ash Store has a beginning cash balance of 4''3 on 6arch 1. The firm has pro2ected sales of 4)13 in February5 4)83 in 6arch5 and 4-'3 in !pril. The cost of goods sold is e.ual to -3 percent of sales. 9oods are purchased one month prior to the month of sale. The accounts payable period is &3 days and the accounts receivable period is 13 days. The firm has monthly cash e1penses of 41)3. :hat is the pro2ected ending cash balance at the end of 6arch; !ssume every month has &3 days. !. 4%(8 ". 4')1 C. 4(3#. 4()$. 4)%1

18-%&

Chapter 18 - Short-Term Finance and Planning

8). Fancy Footwear has a line of credit with a local ban, in the amount of 4835333. The loan agreement calls for interest of - percent with a compensating balance of ( percent5 which is based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. :hat is the effective interest rate on the loan if the firm needs to borrow 4-(5333 for one year to cover operating e1penses; !. -.&- percent ". -.'& percent C. -.() percent #. 8.1- percent $. 8.&& percent

8-. Buno <ndustrial Supply has a 41(35333 line of credit with a ).( percent interest rate. The loan agreement re.uires a % percent compensating balance5 which is based on the total amount borrowed5 and which will be held in an interest-free account. :hat is the effective interest rate if the firm borrows 4035333 on the line of credit for one year; !. ).'% percent ". ).'- percent C. ).(3 percent #. ).(8 percent $. ).)& percent

88. 8achel7s has a 4(35333 line of credit with Hptown "an,. The line of credit calls for an interest rate of 8 percent and a compensating balance of ' percent. The compensating balance is based on the total amount borrowed and will be held in an interest-free account. :hat is the effective annual interest rate if the firm borrows 4&(5333 for one year; !. -.-) percent ". 8.33 percent C. 8.1- percent #. 8.&& percent $. 8.'% percent

18-%'

Chapter 18 - Short-Term Finance and Planning

80. The #elta Fish Catchery factors its accounts receivables immediately at a 1.( percent discount. The average collection period is &' days. !ssume that all accounts are collected in full. :hat is the effective annual interest rate on this arrangement; !. 1-.)1 percent ". 18.%3 percent C. 18.&) percent #. 18.-8 percent $. 10.3' percent

03. >ew Dor, "an, provides Food Canning5 <nc. a 4%(35333 line of credit with an interest rate of 1.-( percent per .uarter. The credit line also re.uires that 1 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Food Canning5 <nc.7s short-term investments are paying 1.% percent per .uarter. :hat is the effective annual interest rate on this arrangement if the line of credit goes unused all year; !ssume any funds borrowed or invested use compound interest. !. '.-) percent ". '.83 percent C. '.80 percent #. -.33 percent $. -.%- percent

01. The Sports Store has a 41335333 line of credit with City "an,. The loan agreement re.uires that % 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.' percent per .uarter. The Sport Store7s short-term investments are paying 1.( percent per .uarter. :hat is the effective annual interest rate on the line of credit if The Sports Store borrows the entire 41335333 for one year; !ssume any funds borrowed or invested use compound interest. !. (.-% percent ". (.-) percent C. ).33 percent #. ).38 percent $. ).1' percent

18-%(

Chapter 18 - Short-Term Finance and Planning

0%. Dour ban, offers you a 4'35333 line of credit with an interest rate of 1.-( percent per .uarter. The loan agreement also re.uires that % percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Dour shortterm investments are paying 3.%3 percent per month. :hat is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year; !ssume any funds borrowed or invested use compound interest. !. %.33 percent ". %.'& percent C. &.18 percent #. -.33 percent $. -.10 percent

0&. >ew Town "an, offers you a 4'35333 line of credit with an interest rate of 1.8( percent per .uarter. The loan agreement also re.uires that & 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 .uarter. :hat is the effective annual interest rate on the line of credit if you borrow the entire 4'35333 for one year; !ssume any funds borrowed or invested use compound interest. !. '.'- percent ". '.(8 percent C. -.)1 percent #. -.-8 percent $. 1%.&& percent

0'. Bosie7s Craft Shac, has a beginning cash balance for the .uarter of 4151%). The store has a policy of maintaining a minimum cash balance of 415333 and is willing to borrow funds as needed to maintain that balance. Currently5 the firm has a loan balance of 4'83. Cow much will the store borrow or repay if the net cash flow for the .uarter is -4%83; !. 43 ". 4%8 C. 41%) #. 41(' $. 4%83

18-%)

Chapter 18 - Short-Term Finance and Planning

0(. The Cement :or,s has a beginning cash balance for the .uarter of 4-8'. Susie5 the firm7s president5 re.uires that a minimum cash balance of 4833 be maintained and re.uires that borrowing be used to maintain that balance. <f funds have been borrowed5 then she re.uires that those loans be repaid as soon as e1cess funds are available. Currently5 the firm has a loan outstanding of 415%)3. Cow much will the firm borrow or repay this .uarter if the .uarterly receipts are 4&5018 and the .uarterly disbursements are 4&5--'; !. borrow 41) ". borrow 41%8 C. borrow 41'' #. repay 41%8 $. repay 41''

0). !t the beginning of the year5 you have an outstanding short-term loan of 4%-' which was used to cover your cash needs for the previous year. The interest e1pense for the year is 410. The pro2ected net cash flow for this year is 41%&5 prior to any payment of principal or interest on this loan. :hat is your anticipated loan balance at year end; !. 41(1 ". 41-3 C. 41-) #. 4180 $. 410&

Essay Questions

0-. Aist and describe the three basic types of secured inventory loans. Compare the advantages and disadvantages of these loans.

18-%-

Chapter 18 - Short-Term Finance and Planning

08. Hsing two separate graphs5 illustrate a fle1ible and a restrictive short-term financing policy. Place costs on the vertical a1is and current assets on the hori?ontal a1is. @n each graph5 indicate the shortage costs5 carrying costs5 total costs5 and indicate the optimal investment in current assets.

00. !ssume that long-term interest rates are substantially higher than short-term interest rates and are e1pected to remain that way for the foreseeable future. Cow does this affect a firm7s selection of a financing policy for its current assets;

133. Compensating balances are fre.uently a part of revolving lending arrangements with ban,s5 yet they add to the cost of financing for the borrower. :hy5 then5 would borrowers agree to such terms; :hat other types of alternative financing are available;

18-%8

Chapter 18 - Short-Term Finance and Planning


Multiple Choice Questions

131. #etails Corp. has a boo, net worth of 4851(3. Aong-term debt is 415)(3. >et wor,ing capital5 other than cash5 is 4%51(3. Fi1ed assets are 4%5333. Cow much cash does the company have; !. 4'5%(3 ". 4'5((3 C. 4(51(3 #. 4(5)(3 $. 4)5-(3

13%. The :a,e-Hp Coffee Company has pro2ected the following .uarterly sales amounts for the coming year

!ccounts receivable at the beginning of the year are 4%33. :a,e-Hp has a )3-day collection period. :hat is the amount of the accounts receivable balance at the end of Fuarter &; !. 4&-( ". 4'(3 C. 4(33 #. 4)33 $. 4-33

18-%0

Chapter 18 - Short-Term Finance and Planning

13&. Consider the following financial statement information for the "ulldog <cers Corporation

Cow long is the cash cycle; !. &).) days ". &-.% days C. '1.3 days #. '1.' days $. '%.8 days

13'. Dour firm has an average collection period of '% days. Current practice is to factor all receivables immediately at a ' percent discount. !ssume that default is e1tremely unli,ely. :hat is the effective cost of borrowing; !. %8.-0 percent ". &).%3 percent C. &-.-8 percent #. '3.0- percent $. '%.(8 percent

18-&3

Chapter 18 - Short-Term Finance and Planning

13(. :or,out Together has pro2ected the following sales for the coming year

Sales in the year following this one are pro2ected to be 18 percent greater in each .uarter. !ssume the firm places orders during each .uarter e.ual to %0 percent of pro2ected sales for the ne1t .uarter. Cow much will the firm pay to its suppliers in Fuarter % if its accounts payable period is )3 days; !. 4%1%.)". 4%%'.&& C. 4%'1.)#. 4%(1.&& $. 4%().)-

13). The Thunder #an7s Corporation7s purchases from suppliers in a .uarter are e.ual to )( percent of the ne1t .uarter7s forecasted sales. The payables period is )3 days. :ages5 ta1es5 and other e1penses are 1) percent of sales5 and interest and dividends are 4)3 per .uarter. >o capital e1penditures are planned. Sales for the first .uarter of the following year are pro2ected at 4-%3. The pro2ected .uarterly sales are

:hat is the amount of the total disbursements for Fuarter %; !. 4()'.%". 4(-0.'& C. 4(8%.1( #. 4(8(.&3 $. 4(03.)-

18-&1

Chapter 18 - Short-Term Finance and Planning

13-. The following is the sales budget for #uc,-n-8un5 <nc.5 for the first .uarter of %330

The accounts receivable balance at the end of the previous .uarter was 4'(5333 *4&%5333 of which was uncollected #ecember sales.+ :hat is the amount of the Banuary collections; !. 411%5'33.33 ". 411%5'38.1) C. 411(5-3&.3& #. 41%%5&().&& $. 41%(5'33.33

18-&%

Chapter 18 - Short-Term Finance and Planning

138. Cere are some important figures from the budget of >ashville >ougats5 <nc.5 for the second .uarter of %330

The company predicts that & percent of its credit sales will never be collected5 &) percent of its sales will be collected in the month of sale5 and the remaining )1 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. <n 6arch %3305 credit sales were 4&3%5'335 and credit purchases were 4%%'5)'3. The !pril 1 cash balance was 4'3&5%33. :hat is the cash balance at the end of 6ay; !. 4&'8588". 4&))58') C. 4'1'51'1 #. 4'(-5--$. 4'--5&-'

18-&&

Chapter 18 - Short-Term Finance and Planning

130. Dou7ve wor,ed out a line of credit arrangement that allows you to borrow up to 4(3 million at any time. The interest rate is 3.( percent per month. <n addition5 ( percent of the amount that you borrow must be deposited in a non-interest bearing account. !ssume your ban, uses compound interest on its line of credit loans. :hat is the effective annual interest rate on this lending arrangement; !. ).(3 percent ". ).)% percent C. ).81 percent #. ).8- percent $. ).0' percent

113. ! ban, offers your firm a revolving credit arrangement for up to 411( million at an interest rate of % percent per .uarter. The ban, also re.uires you to maintain a compensating balance of ( percent against the unused portion of the credit line5 to be deposited in a noninterest-bearing account. !ssume you have a short-term investment account at the ban, that pays 1.& percent per .uarter5 and assume the ban, uses compound interest on its revolving credit loans. :hat is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year; !. 3 percent ". (.3 percent C. (.% percent #. (.& percent $. (.( percent

18-&'

Chapter 18 - Short-Term Finance and Planning

Chapter 18 Short-Term Finance and Planning !nswer Gey

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. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

%. The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the !. operating cycle. . inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: )n!entory (eriod

18-&(

Chapter 18 - Short-Term Finance and Planning

&. The length of time between the sale of inventory and the collection of the payment for that sale is called the !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. $. cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts recei!able (eriod

'. 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 !. operating cycle. ". inventory period. C. accounts receivable period. !. accounts payable period. $. cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts (ayable (eriod

18-&)

Chapter 18 - Short-Term Finance and Planning

(. 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 !. operating cycle. ". inventory period. C. accounts receivable period. #. accounts payable period. E. cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

). ! graphical representation of the operating and cash cycles is called a*n+ !. operating chart. . cash flow time line. C. production flow line. #. component chart. $. wor,ing time line. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* flow time line

18-&-

Chapter 18 - Short-Term Finance and Planning

-. Costs that increase as a firm ac.uires additional current assets are called ///// costs. A. carrying ". shortage C. order #. safety $. trading 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: Carrying costs

8. Costs that decrease as a firm ac.uires additional current assets are called ///// costs. !. carrying . shortage C. debt #. e.uity $. payables 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ortage costs

18-&8

Chapter 18 - Short-Term Finance and Planning

0. Steve has estimated the cash inflows and outflows for his hardware store for ne1t year. The report that he has prepared recapping these cash flows is called a !. pro forma income statement. ". sales pro2ection. C. cash budget. #. receivables analysis. $. credit analysis. 8efer to section 18.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* budget

13. Taylor Supply has made an agreement with its ban, that it can borrow up to 4135333 at any time over the ne1t year. This arrangement is called a*n+ !. floor loan. ". open loan. C. compensating balance. !. line of credit. $. ban, note. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Line of credit

18-&0

Chapter 18 - Short-Term Finance and Planning

11. 6oney deposited by a borrower with the ban, in a low or non-interest-bearing account as a condition of a loan agreement is called a A. compensating balance. ". secured credit deposit. C. letter of credit. #. line of credit. $. pledge. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Com(ensating balances

1%. "rustle7s Pottery either factors or assigns all of its receivables to other firms. This is ,nown as A. accounts receivable financing. ". pledged financing. C. capital funding. #. daily funding. $. capital financing. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Accounts recei!able financing

18-'3

Chapter 18 - Short-Term Finance and Planning

1&. 8ose7s 9ift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an e1ample of a*n+ !. debenture. ". line of credit. C. ban,er7s acceptance. #. wor,ing loan. E. inventory loan. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: )n!entory loan

1'. :hich one of the following increases cash; !. granting credit to a customer ". purchasing new machinery C. ma,ing a payment on a ban, loan #. purchasing inventory E. accepting credit from a supplier 8efer to section 18.1

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#%" 'o(ic: Sources and uses of cas*

18-'1

Chapter 18 - Short-Term Finance and Planning

1(. :hich of the following are uses of cash; <. collecting a receivable <<. increasing inventory <<<. obtaining a ban, loan <=. paying a supplier for previous purchases !. < and <<< only . << and <= only C. < and << only #. <5 <<5 and <= only $. <<5 <<<5 and <= only 8efer to section 18.1

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#%" 'o(ic: Sources and uses of cas*

1). :hich one of the following will increase net wor,ing capital; !ssume the current ratio is greater than 1.3. !. paying a supplier for a previous purchase ". paying off a long-term debt C. selling inventory at cost #. purchasing inventory on credit E. selling inventory at a profit on credit 8efer to section 18.1

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#%" 'o(ic: Net wor.ing ca(ital

18-'%

Chapter 18 - Short-Term Finance and Planning

1-. :hich one of the following will decrease the net wor,ing capital of a firm; !ssume the current ratio is greater than 1.3. !. selling inventory at cost ". collecting payment from a customer C. paying a payment on a long-term debt #. selling a fi1ed asset for boo, value $. paying a supplier for the purchase of an inventory item 8efer to section 18.1

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#%" 'o(ic: Net wor.ing ca(ital

18. :hich of the following are sources of cash; <. decrease in inventory <<. increase in accounts receivable <<<. repayment of a bond <=. sale of preferred stoc, !. < and <<< only . < and <= only C. << and <<< only #. <5 <<5 and <<< only $. <5 <<<5 and <= only 8efer to section 18.1

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#%" 'o(ic: Sources of cas*

18-'&

Chapter 18 - Short-Term Finance and Planning

10. :hich of the following will increase the operating cycle; <. increasing the inventory turnover rate <<. increasing the payables period <<<. decreasing the receivable turnover rate <=. decreasing the inventory level !. < only . <<< only C. << and <= only #. < and <= only $. << and <<< only 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

%3. :hich one of the following e.uals the operating cycle; !. cash cycle plus accounts receivable period . inventory period plus the accounts receivable period C. inventory period plus the accounts payable period #. accounts payable period minus the cash cycle $. accounts payable period plus the accounts receivable period 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

18-''

Chapter 18 - Short-Term Finance and Planning

%1. :hich one of the following will decrease the operating cycle; !. decreasing the inventory turnover rate ". decreasing the accounts payable period C. increasing the accounts receivable turnover rate #. increasing the accounts payable period $. increasing the accounts receivable period 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

%%. The operating cycle describes how a product !. is priced. ". is sold. C. moves through the current asset accounts. #. moves through the production process. $. generates a profit. 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

18-'(

Chapter 18 - Short-Term Finance and Planning

%&. :hich of the following determines the length of the operating cycle; <. cash cycle <<. inventory period <<<. accounts payable period <=. accounts receivable period !. < and <<< only . << and <= only C. <5 <<5 and <= only #. <<5 <<<5 and <= only $. <5 <<5 <<<5 and <= 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

%'. :hich of the following will increase the cash cycle5 all else constant; <. increasing the inventory period <<. decreasing the accounts receivable turnover rate <<<. increasing the accounts payable period <=. decreasing the accounts receivable period A. < and << only ". <<< and <= only C. < and <= only #. <5 <<5 and <<< only $. <5 <<<5 and <= only 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

18-')

Chapter 18 - Short-Term Finance and Planning

%(. !n increase in which one of the following will decrease the cash cycle5 all else e.ual; !. payables turnover ". days sales in inventory C. operating cycle !. inventory turnover rate $. accounts receivable period 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

%). 6etal #esigns5 <nc.5 historically produced products for inventory. >ow5 the firm only produces a product when it receives an actual order from a customer. !ll else e.ual5 this change will !. increase the operating cycle. ". lengthen the accounts receivable period. C. shorten the accounts payable period. !. decrease the cash cycle. $. decrease the inventory turnover rate. 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

18-'-

Chapter 18 - Short-Term Finance and Planning

%-. :hich of the following statements are correct; <. !n increase in the accounts payable period shortens the cash cycle. <<. The cash cycle is e.ual to the operating cycle minus the inventory period. <<<. ! negative cash cycle is preferable to a positive cash cycle. <=. The cash cycle plus the accounts receivable period is e.ual to the operating cycle. !. < only ". <<< and <= only C. < and <<< only #. < and <= only $. <5 <<5 and <<< only 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

%8. :hich one of the following statements is correct concerning the cash cycle; A. The longer the cash cycle5 the more li,ely a firm will need e1ternal financing. ". <ncreasing the accounts payable period increases the cash cycle. C. ! positive cash cycle is preferable to a negative cash cycle. #. The cash cycle can e1ceed the operating cycle if the payables period is e.ual to ?ero. $. @ffering early payment discounts to customers will tend to increase the cash cycle. 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

18-'8

Chapter 18 - Short-Term Finance and Planning

%0. :hich of the following actions will tend to decrease the inventory period; <. discontinuing all slow-selling merchandise <<. selling obsolete inventory below cost 2ust to get rid of it <<<. buying raw materials only as needed for the manufacturing process <=. producing goods on demand versus for inventory !. < and <<< only ". << and <= only C. <<5 <<<5 and <= only #. <5 <<5 and <<< only E. <5 <<5 <<<5 and <= 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: )n!entory (eriod

&3. :hich one of the following actions will tend to increase the accounts receivable period; !ssume the accounts receivable period is currently &' days. !. tightening the standards for granting credit to customers ". refusing to grant additional credit to any customer who pays late C. increasing the finance charges applied to all customer balances outstanding over thirty days #. granting discounts for cash sales E. eliminating the discount for early payment by credit customers 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts recei!able (eriod

18-'0

Chapter 18 - Short-Term Finance and Planning

&1. !n increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive; !. bad debts . accounts receivable turnover rate C. accounts receivable period #. credit sales $. operating cycle 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts recei!able (eriod

&%. <f you pay your suppliers five days sooner5 then !. your payables turnover rate will decrease. . you may re.uire additional funds from other sources to fund the cash cycle. C. the cash cycle will decrease. #. your operating cycle will increase. $. the accounts receivable period will decrease. 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts (ayable (eriod

18-(3

Chapter 18 - Short-Term Finance and Planning

&&. :hich one of the following will increase the accounts payable period5 all else constant; !. an increase in the cost of goods sold account value . an increase in the ending accounts payable balance C. an increase in the cash cycle #. a decrease in the operating cycle $. an increase in the accounts payable turnover rate 8efer to section 18.%

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts (ayable (eriod

&'. :hich one of the following managers determines which customers must pay cash and which can charge their purchases; !. purchasing manager . credit manager C. controller #. production manager $. payables manager 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Organi/ational c*art

18-(1

Chapter 18 - Short-Term Finance and Planning

&(. :hich one of the following managers determines when a supplier will be paid; !. controller . payables manager C. credit manager #. purchasing manager $. production manager 8efer to section 18.%

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Organi/ational c*art

&). ! firm with a fle1ible short-term financial policy will !. maintain a low balance in accounts receivables. ". only have minimal amounts5 if any5 invested in mar,etable securities. C. invest heavily in inventory. #. have low cash balances. $. have tight restrictions on granting credit to customers. 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

18-(%

Chapter 18 - Short-Term Finance and Planning

&-. :hich one of the following is indicative of a short-term restrictive financial policy; A. purchasing inventory on an as-needed basis ". granting credit to all customers C. investing heavily in mar,etable securities #. maintaining a large accounts receivable balance $. ,eeping inventory levels high 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

&8. :hich of the following are associated with a restrictive short-term financial policy; <. little5 if any5 investment in mar,etable securities <<. liberal credit terms for customers <<<. low cash balances <=. increasing inventory levels A. < and <<< only ". << and <= only C. < and <= only #. <<< and <= only $. <5 <<5 and <<< only 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

18-(&

Chapter 18 - Short-Term Finance and Planning

&0. The Aumber 6art recently replaced its management team. !s a result5 the firm is implementing a restrictive short-term policy in place of the fle1ible policy under which the firm had been operating. :hich of the following should the employees e1pect as a result of this policy change; <. reduction in sales due to stoc, outs <<. greater inventory selection <<<. decreased sales due to the new accounts receivable credit policy <=. decreased investment in mar,etable securities !. < and << only ". << and <= only C. <5 <<5 and <= only !. <5 <<<5 and <= only $. <5 <<5 <<<5 and <= 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

'3. ! fle1ible short-term financial policy A. increases a firm7s need for long-term financing. ". minimi?es net wor,ing capital. C. avoids bad debts by only selling items for cash. #. ma1imi?es fi1ed assets and minimi?es current assets. $. is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs. 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

18-('

Chapter 18 - Short-Term Finance and Planning

'1. ! fle1ible short-term financial policy <. increases shortage costs due to fre.uent cash-outs. <<. tends to increase sales as compared to a restrictive policy. <<<. re.uires a si?eable investment in current assets. <=. incurs more carrying costs than a restrictive policy. !. < and <= only ". << and <<< only C. <5 <<5 and <<< only !. <<5 <<<5 and <= only $. <5 <<<5 and <= only 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ort$term financial (olicy

'%. Shortage costs include which of the following; <. disruption of production schedules <<. inventory ordering costs <<<. lost customer goodwill <=. bro,erage costs !. < and << only ". << and <<< only C. <<5 <<<5 and <= only #. <5 <<5 and <<< only E. <5 <<5 <<<5 and <= 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: S*ortage costs

18-((

Chapter 18 - Short-Term Finance and Planning

'&. The optimal investment in current assets for an operating firm occurs at the point where !. both shortage costs and carrying costs e.ual ?ero. ". shortage costs are e.ual to ?ero. C. carrying costs are e.ual to ?ero. #. carrying costs e1ceed shortage costs. E. the total costs of holding current assets is minimi?ed. 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: O(timal (oint

''. :hich one of the following statements is correct; !. ! firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets. . ! firm with a fle1ible financing policy fre.uently invests in mar,etable securities. C. ! firm with a fle1ible financing policy tends to use short-term financing on a fre.uent basis. #. Firms tend to avoid short-term financing under both restrictive and fle1ible financing policies. $. Firms with seasonal sales select fle1ible financing policies. 8efer to section 18.&

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: Asset financing (olicies

18-()

Chapter 18 - Short-Term Finance and Planning

'(. :hich one of the following statements is correct; !. Seasonal needs are financed e1ternally when firms adhere to a fle1ible financing policy. ". ! fle1ible financing policy tends to increase the ris, of encountering financial distress. C. Aong-term interest rates tend to be less volatile than short-term rates. #. 6ost firms tend to finance inventory with long-term debt. $. Short-term interest rates are generally higher than long-term rates. 8efer to section 18.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$& Section: "#%+ 'o(ic: 0inancing (olicies

'). !ssume each month has &3 days and a firm has a )3-day accounts receivable period. #uring the second calendar .uarter of the year5 that firm will collect payment for the sales it made during which of the following months; !. @ctober5 >ovember5 and #ecember ". >ovember5 #ecember5 and Banuary C. #ecember5 Banuary5 and February #. Banuary5 February5 and 6arch E. February5 6arch5 and !pril 8efer to section 18.'

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

18-(-

Chapter 18 - Short-Term Finance and Planning

'-. The Carvester collects %( percent of sales in the month of sale5 )3 percent of sales in the month following the month of sale5 and 1( percent of sales in the second month following the month of sale. #uring the month of !pril5 the firm will collect !. )3 percent of February sales. ". 1( percent of !pril sales. C. )3 percent of 6arch sales. #. 1( percent of 6arch sales. $. %( percent of February sales. 8efer to section 18.'

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

'8. ! manufacturing firm has a 03 day collection period. The firm produces seasonal merchandise and thus has the least sales during the first .uarter of a year and the highest level of sales during the fourth .uarter of a year. The firm maintains a relatively steady level of production which means that its cash disbursements are fairly e.ual in all .uarters. The firm is most apt to face a cash-out situation in !. the first .uarter. . the second .uarter. C. the third .uarter. #. the fourth .uarter. $. any .uarter with e.ual probabilities of occurrence. 8efer to section 18.'

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

18-(8

Chapter 18 - Short-Term Finance and Planning

'0. Bill is the CF@ of Summertime !dventures which is a seasonal firm speciali?ing in products related to water sports. The firm purchases inventory one month before it is sold and pays for its purchases )3 days after the invoice date. Sales are highest during Buly and !ugust. Currently5 Bill is preparing the cash disbursements section of the firm7s cash budget. :hich one of the following statements is supported by this information; !. <nventory purchases will be highest during the months of Buly and !ugust. ". <nventory purchases will be highest during the months of 6ay and Bune. C. Payments to suppliers will be highest during the months of Bune and Buly. #. Payments to suppliers will be highest during the months of Buly and !ugust. E. Payments to suppliers will be highest during the months of !ugust and September. 8efer to section 18.'

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* disbursements

(3. :hich two of the following are most apt to cause a cash-out for a firm that is generally financially sound; <. fi1ed e1penses <<. fi1ed asset purchases <<<. fle1ible financing policy <=. highly seasonal sales !. < and <<< only . << and <= only C. <<< and <= only #. <5 <<5 and <<< only $. <<5 <<<5 and <= only 8efer to section 18.'

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas*$out

18-(0

Chapter 18 - Short-Term Finance and Planning

(1. :hich one of the following statements is correct concerning the cash balance of a firm; !. 6ost firms attempt to maintain a ?ero cash balance at all times. ". The cumulative cash surplus shown on a cash budget is e.ual to the ending cash balance plus the minimum desired cash balance. C. @n a cash balance report5 the cumulative cash surplus at the end of 6ay is used as Bune7s beginning cash balance. !. ! cumulative cash deficit indicates a borrowing need. $. The ending cash balance must e.ual the minimum desired cash balance. 8efer to section 18.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* balance

(%. ! cumulative cash deficit indicates a firm A. has at least a short-term need for e1ternal funding. ". is facing long-term financial distress. C. will go out of business within the year. #. is capable of funding all of its needs internally. $. is using its cash wisely. 8efer to section 18.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* balance

18-)3

Chapter 18 - Short-Term Finance and Planning

(&. The most common means of financing a temporary cash deficit is a !. long-term secured ban, loan. ". short-term secured ban, loan. C. short-term issue of corporate bonds. #. long-term unsecured ban, loan. E. short-term unsecured ban, loan. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

('. The primary difference between a line of credit and a revolving credit arrangement is the !. type of collateral used to secure the loan. . length of the credit period. C. fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured. #. fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured. $. classification as either a committed or a noncommitted loan. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

18-)1

Chapter 18 - Short-Term Finance and Planning

((. ! compensating balance <. is re.uired when a firm ac.uires any ban, financing other than a line of credit. <<. increases the cost of short-term ban, financing. <<<. may be re.uired even if a firm never borrows funds. <=. is often used as a means of paying for ban,ing services received. !. < and <<< only ". << and <= only C. << and <<< only #. < and <= only E. <<5 <<<5 and <= only 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

(). Cigh Point Cotel *CPC+ has 41)(5333 in accounts receivable. To finance a ma2or purchase5 the company assigns these receivables to Cross Town "an,. :hich one of the following statements correctly describes this transaction; !. CPC will immediately receive 41)(5333 and will have no further obligation related to these receivables. . CPC will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables. C. Cross Town "an, accepts full responsibility for the collection of the accounts receivables and5 in e1change5 immediately pays CPC a discounted value for its receivables. #. Cross Town "an, accepts full responsibility for collecting the accounts receivables and pays CPC a discounted price for the accounts collected after the normal collection period has elapsed. $. CPC receives the full amount of its receivables upon assignment but must reimburse Cross Town "an, for any uncollected account. 8efer to section 18.(

AACSB: N/A Bloom's: Com(re*ension Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

18-)%

Chapter 18 - Short-Term Finance and Planning

(-. :hich one of the following statements is correct; !. The assignment of receivables involves selling the firm7s accounts receivables at full price. . Aines of credit fre.uently re.uire a cleanup period. C. :ith maturity factoring5 the borrower receives the loan amount immediately. #. Commercial paper is short-term financing offered to highly-rated corporations by ma2or ban,s. $. Credit card receivables funding is a relatively ine1pensive method of borrowing on a shortterm basis. 8efer to section 18.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

(8. :hich of the following are benefits derived from short-term financial planning; <. having advance notice of when your firm will re.uire e1ternal financing <<. being able to determine the e1tent of time for which a loan is re.uired <<<. having the ability to time capital e1penditures in order to place the least financial burden possible on a firm <=. ,nowing for certain what your cash balance will be si1 months in advance !. < and <<< only . <5 <<5 and <<< only C. <<5 <<<5 and <= only #. <5 <<5 and <= only $. <5 <<5 <<<5 and <= 8efer to section 18.)

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%1 'o(ic: S*ort$term financial (lan

18-)&

Chapter 18 - Short-Term Finance and Planning

(0. #enver <nteriors5 <nc.5 has sales of 48&)5333 and cost of goods sold of 4)315333. The firm had a beginning inventory of 4'15333 and an ending inventory of 4'-5333. :hat is the length of the inventory period; !. 10.%1 days ". %3.80 days C. %).-% days #. &3.(& days $. &&.)0 days <nventory turnover I 4)315333JK*4'15333 L 4'-5333+J%M I 1&.)(030 <nventory period I &)(J1&.)(030 I %).-% days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: )n!entory (eriod

)3. ! national firm has sales of 4-%05333 and cost of goods sold of 4'-85333. !t the beginning of the year5 the inventory was 4&-5333. !t the end of the year5 the inventory balance was 4'15333. :hat is the inventory turnover rate; A. 1%.%) times ". 1%.-8 times C. 1'.%% times #. 18.() times $. 10.-3 times <nventory turnover I 4'-85333JK*4&-5333 L 4'15333+J%M I 1%.%) times

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: )n!entory turno!er

18-)'

Chapter 18 - Short-Term Finance and Planning

)1. >orth Side :holesalers has sales of 40'85333. The cost of goods sold is e.ual to -% percent of sales. The firm has an average inventory of 4%&5333. Cow many days on average does it ta,e the firm to sell its inventory; !. 11.%' days . 1%.&3 days C. 1).'8 days #. %).&( days $. %0.)8 days <nventory turnover I *40'85333 3.-%+J4%&5333 I %0.)-)( <nventory period I &)(J%0.)-)( I 1%.&3 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: )n!entory (eriod

)%. The "ear 8ug has sales of 48115333. The cost of goods sold is e.ual to )& percent of sales. The beginning accounts receivable balance is 4'15333 and the ending accounts receivable balance is 4&85333. Cow long on average does it ta,e the firm to collect its receivables; !. 1-.%) days . 1-.-8 days C. 18.(8 days #. %3.'' days $. %0.-- days 8eceivables turnover I 48115333JK*4'15333 L 4&85333+J%M I %3.(&1)( 8eceivables period I &)(J%3.(&1)( I 1-.-8 #ays

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts recei!able (eriod

18-)(

Chapter 18 - Short-Term Finance and Planning

)&. The "lue Star has sales of 4&8-53335 costs of goods sold of 4%(053335 average accounts receivable of 4058335 and average accounts payable of 41%5)33. Cow long does it ta,e for the firm7s credit customers to pay for their purchases; !. -.)- days ". 8.-8 days C. 0.%' days #. 11.88 days $. 1&.81 days 8eceivables turnover I 4&8-5333J405833 I &0.'808 8eceivables period I &)(J&0.'808 I 0.%' days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts recei!able (eriod

)'. The 6ountain Top Shoppe has sales of 4(1%53335 average accounts receivable of 4&15'33 and average accounts payable of 4%'5833. The cost of goods sold is e.uivalent to -1 percent of sales. Cow long does it ta,e The 6ountain Top Shoppe to pay its suppliers; !. %1.-) days ". %%.&8 days C. %'.03 days #. %(.80 days $. %).)- days Payables turnover I *4(1%5333 3.-1+J4%'5833 I 1'.)(81 Payables period I &)(J1'.)(81 I %'.03 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts (ayable (eriod

18-))

Chapter 18 - Short-Term Finance and Planning

)(. C9 Aivery Supply had a beginning accounts payable balance of 4(-5&33 and an ending accounts payable balance of 4((5133. Sales for the period were 4)135333 and costs of goods sold were 4''%5333. :hat is the payables turnover rate; A. -.8) times ". 8.&0 times C. 0.3% times #. 0.8) times $. 13.8( times Payables turnover I 4''%5333JK*4(-5&33 L 4((5133+J%+M I -.8) times

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Accounts (ayable turno!er

)). Dour firm has an inventory turnover rate of 1'5 a payables turnover rate of 85 and a receivables turnover rate of 10. Cow long is your firm7s operating cycle; !. '(.3) days . '(.%8 days C. '(.)& days #. (&.1& days $. (&.-8 days <nventory period I &)(J1' I %).3- days !ccounts receivable period I &)(J10 I 10.%1 days @perating cycle I %).3- L 10.%1 days I '(.%8 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

18-)-

Chapter 18 - Short-Term Finance and Planning

)-. 6erryl $nterprises currently has an operating cycle of )% days. The firm is analy?ing some operational changes5 which are e1pected to increase the accounts receivable period by % days and decrease the inventory period by ( days. The accounts payable turnover rate is e1pected to increase from '% to ') times per year. <f all of these changes are adopted5 what will the firm7s new operating cycle be; !. (1 days ". (- days C. (0 days #. )3 days $. )( days @perating cycle I )% L % - ( I (0 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

)8. @n average5 Furniture E 6ore is able to sell its inventory in %- days. The firm ta,es 8days on average to pay for its purchases. @n the other hand5 its average customer pays with a credit card which allows the firm to collect its receivables in ' days. 9iven this information5 what is the length of operating cycle; A. &1 days ". &8 days C. '( days #. () days $. )% days @perating cycle I %- L ' I &1 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

18-)8

Chapter 18 - Short-Term Finance and Planning

)0. <nterior #esigns has an inventory period of ') days5 an accounts payable period of &8 days5 and an accounts receivable period of &% days. 6anagement is considering an offer from their suppliers to pay within 13 days and receive a % percent discount. <f the new discount is ta,en5 the accounts payable period is e1pected to decline by %) days. <f the new discount is ta,en5 the operating cycle will be ///// days. !. (% ". )% C. -1 !. -8 $. 01 @riginal operating cycle I ') L &% I -8 daysN The operating cycle will not change as the accounts payable period does not affect the operating cycle5 only the cash cycle.

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: O(erating cycle

-3. 6etal Products Co. has an inventory period of (& days5 an accounts payable period of )8 days5 and an accounts receivable turnover rate of 18. :hat is the length of the cash cycle; !. &.33 days . (.%8 days C. %).%8 days #. -1.33 days $. -&.%8 days Cash cycle I *&)(J18+ L (& - )8 I (.%8 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

18-)0

Chapter 18 - Short-Term Finance and Planning

-1. :est Chester !utomation has an inventory turnover of 1) and an accounts payable turnover of 11. The accounts receivable period is &) days. :hat is the length of the cash cycle; !. (.)- days . %(.)& days C. '1.33 days #. (%.33 days $. (8.81 days Cash cycle I *&)(J1)+ L &) - *&)(J11+ I %(.)& days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

-%. Peterson7s !nti.uities currently has a &1 day cash cycle. !ssume the firm changes its operations such that it decreases its receivables period by % days5 decreases its inventory period by & days5 and decreases its payables period by ' days. :hat will the length of the cash cycle be after these changes; !. %% days ". %& days C. %0 days !. &3 days $. &1 days Cash cycle I &1 - % - & L ' I &3 days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

18--3

Chapter 18 - Short-Term Finance and Planning

-&. ! company currently has a '8 day cash cycle. !ssume the firm changes its operations such that it decreases its receivables period by % days5 increases its inventory period by & days5 and increases its payables period by ' days. :hat will the length of the cash cycle be after these changes; !. '% days ". '& days C. '( days #. '- days $. '0 days Cash cycle I '8 - % L & - ' I '( days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

-'. Tall 9uys Clothing has a '( day collection period. Sales for the ne1t calendar year are estimated at 4%51335 415)335 4%5(33 and 4%5&335 respectively5 by .uarter5 starting with the first .uarter of the year. 9iven this information5 which one of the following statements is correct; !ssume a year has &)3 days. !. The firm will collect 4833 in Fuarter %. ". The accounts receivable balance at the beginning of Fuarter ' will be 4151(3. C. The firm will collect 4%5333 in Fuarter &. #. The firm will have an accounts receivable balance of 4%5&33 at the end of the year. E. The firm will collect a total of 4%5'33 in Fuarter '. F' collections I '(J03 *4%5(33+ L '(J03 *4%5&33+ I 4%5'33

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

18--1

Chapter 18 - Short-Term Finance and Planning

-(. Forest 9ardens5 <nc.5 has a beginning receivables balance on February 1 of 4-&3. Sales for February through 6ay are 4-%35 4-)35 48%35 and 48(35 respectively. The accounts receivable period is &3 days. :hat is the amount of the !pril collections; !ssume a year has &)3 days. !. 4-%3 . 4-)3 C. 4-03 #. 48%3 $. 48(3 <n !pril5 the firm would collect 6arch sales of 4-)3.

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

-). #avis and #avis have e1pected sales of 4'035 4')(5 4'(35 and 4(-3 for the months of Banuary through !pril5 respectively. The accounts receivable period is %8 days. :hat is the accounts receivable balance at the end of 6arch; !ssume a year has &)3 days. A. 4'%3 ". 4'%) C. 4''3 #. 4'(3 $. 4'8% 6arch ending receivables I *%8J&3+ 4'(3 I 4'%3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Accounts recei!able balance

18--%

Chapter 18 - Short-Term Finance and Planning

--. The !thletic Sports Store has a beginning receivables balance on Banuary 1 of 4'13. Sales for Banuary through !pril are 4''35 4')35 4)035 and 4-%35 respectively. The accounts receivable period is )3 days. Cow much did the firm collect in the month of !pril; !ssume a year has &)3 days. !. 4'13 ". 4''3 C. 4')3 #. 4)03 $. 4-%3 !pril collections I February sales I 4')3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

-8. "rea,water !.uatics has a '( day accounts receivable period. The estimated .uarterly sales for this year5 starting with the first .uarter5 are 4)58335 4-51335 485%335 and 4)5'335 respectively. :hat is the accounts receivable balance at the beginning of the third .uarter; !ssume a year has &)3 days. !. 4&5'33 . 4&5((3 C. 4)50(3 #. 4-5133 $. 4-5)(3 !J8 "egin F& I !J8 $nd F% I *'(J03+ 4-5133 I 4&5((3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Accounts recei!able balance

18--&

Chapter 18 - Short-Term Finance and Planning

-0. The #og Couse e1pects sales of 4()35 4)(35 4)-35 and 4)13 for the months of 6ay through !ugust5 respectively. The firm collects %3 percent of sales in the month of sale5 -3 percent in the month following the month of sale5 and 8 percent in the second month following the month of sale. The remaining % percent of sales is never collected. Cow much money does the firm e1pect to collect in the month of !ugust; !. 4)%1 ". 4)%8 C. 4)&& #. 4)&0 E. 4)'& !ugust collections I 3.%3*4)13+ L 3.-3*4)-3+ L 3.38*4)(3+ I 4)'&

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

83. The :ire Couse purchases its inventory one .uarter prior to the .uarter of sale. The purchase price is (( percent of the sales price. The accounts payable period is '( days. The accounts payable balance at the beginning of .uarter one is 4)%5333. :hat is the amount of the e1pected disbursements for .uarter two given the following e1pected .uarterly sales;

!. 4%35(33 . 4%15-%( C. 4%'5%(3 #. 4%)5333 $. 4%)5)-( F% disbursements I K*'(J03+ *3.((+ 4&)5333M L K*'(J03+ *3.((+ 4'&5333M I 4%15-%(

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* disbursements

18--'

Chapter 18 - Short-Term Finance and Planning

81. >adine7s "outi.ue has a &3 day accounts payable period. The firm has e1pected .uarterly sales of 4151335 415'335 415-335 and 4%51335 respectively5 for ne1t year. The .uarterly cost of goods sold is e.ual to )8 percent of the ne1t .uarter7s sales. The firm has a beginning accounts payable balance of 4((3 as of Fuarter 1. :hat is the amount of the pro2ected cash disbursements for accounts payable for Fuarter & of the ne1t year; !ssume a year has &)3 days. !. 41510( ". 415%38 C. 415%'!. 415&&$. 415&83 #isbursement I K*&3J03+ *3.)8 415-33+M L K*)3J03+ *3.)8 4%5133+M I 415&&-

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* disbursements

8%. Gid7s #elight e1pects to sell 485%33 worth of toys in #ecember5 4&5-33 worth in Banuary5 4'5'33 in February5 and 4)5133 in 6arch. The wholesale cost is -% percent of the retail price. The firm has a receivables period of &3 days5 a payables period of )3 days5 and buys inventory one month prior to selling it. :hich one of the following statements is correct; !. The February payments to suppliers are 4%500%. ". The 6arch collections are 4&5-33. C. The accounts receivable balance at the end of 6arch is 4'5'33. #. The purchases for February are 4&51)8. E. The accounts payable balance at the end of Banuary is 4(58&%. Banuary ending !JP balance I 3.-%*4&5-33+ L 3.-%*4'5'33+ I 4(58&%

AACSB: Analytic Bloom's: A((lication Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Accounts (ayable balance

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Chapter 18 - Short-Term Finance and Planning

8&. !s of the beginning of the .uarter5 Swenson7s5 <nc. had a cash balance of 4')3. #uring the .uarter5 the company collected 4(%3 from customers and paid suppliers 4&)3. The company also paid an interest payment of 4%3 and a ta1 payment of 4113. <n addition5 the company repaid 41'3 on its long-term debt. :hat is Callahan7s cash balance at the end of the .uarter; !. -4113 ". 4&%3 C. 4&(3 #. 4'&3 $. 4'03 Cash balance I 4')3 L 4(%3 - 4&)3 - 4%3 - 4113 - 41'3 I 4&(3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* balance

8'. @n 6ay 15 your firm had a beginning cash balance of 41-(. Dour sales for !pril were 4'&3 and your 6ay sales were 4'83. #uring 6ay5 you had cash e1penses of 4113 and payments on your accounts payable of 4%03. Dour accounts receivable period is &3 days. :hat is your firm7s beginning cash balance on Bune 1; !. 41'( ". 41(( C. 4%3( #. 4%1( $. 4%)( Cash balance I 41-( - 4113 - 4%03 L 4'&3 I 4%3(

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* balance

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Chapter 18 - Short-Term Finance and Planning

8(. The 6ish 6ash Store has a beginning cash balance of 4''3 on 6arch 1. The firm has pro2ected sales of 4)13 in February5 4)83 in 6arch5 and 4-'3 in !pril. The cost of goods sold is e.ual to -3 percent of sales. 9oods are purchased one month prior to the month of sale. The accounts payable period is &3 days and the accounts receivable period is 13 days. The firm has monthly cash e1penses of 41)3. :hat is the pro2ected ending cash balance at the end of 6arch; !ssume every month has &3 days. !. 4%(8 . 4')1 C. 4(3#. 4()$. 4)%1 6arch collections I *13J&3+ 4)13 L *%3J&3+ 4)83 I 4)(6arch disbursements for payables I 3.-3 *4)83+ I 4'-) 6arch ending cash balance I 4''3 L 4)(- - 4'-) - 41)3 I 4')1

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* balance

8). Fancy Footwear has a line of credit with a local ban, in the amount of 4835333. The loan agreement calls for interest of - percent with a compensating balance of ( percent5 which is based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. :hat is the effective interest rate on the loan if the firm needs to borrow 4-(5333 for one year to cover operating e1penses; A. -.&- percent ". -.'& percent C. -.() percent #. 8.1- percent $. 8.&& percent !mount borrowed I 4-(5333J*1 - 3.3(+ I 4-850'-.&!nnual interest I 4-850'-.&- 3.3- I 4(5(%).&% $ffective interest rate I 4(5(%).&%J4-(5333 I -.&- percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: )nterest rate wit* com(ensating balance

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Chapter 18 - Short-Term Finance and Planning

8-. Buno <ndustrial Supply has a 41(35333 line of credit with a ).( percent interest rate. The loan agreement re.uires a % percent compensating balance5 which is based on the total amount borrowed5 and which will be held in an interest-free account. :hat is the effective interest rate if the firm borrows 4035333 on the line of credit for one year; !. ).'% percent ". ).'- percent C. ).(3 percent #. ).(8 percent E. ).)& percent !mount borrowed I 4035333J*1 - 3.3%+ I 40158&).-& !nnual interest I 40158&).-& 3.3)( I 4(50)0.&0 $ffective interest rate I 4(50)0.&0J4035333 I ).)& percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: )nterest rate wit* com(ensating balance

88. 8achel7s has a 4(35333 line of credit with Hptown "an,. The line of credit calls for an interest rate of 8 percent and a compensating balance of ' percent. The compensating balance is based on the total amount borrowed and will be held in an interest-free account. :hat is the effective annual interest rate if the firm borrows 4&(5333 for one year; !. -.-) percent ". 8.33 percent C. 8.1- percent !. 8.&& percent $. 8.'% percent !mount borrowed I 4&(5333J*1 - 3.3'+ I 4&)5'(8.&& !nnual interest I 4&)5'(8.&& 3.38 I 4%501).)$ffective interest rate I 4%501).)-J4&(5333 I 8.&& percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: 2ffecti!e interest wit* com(ensating balance

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Chapter 18 - Short-Term Finance and Planning

80. The #elta Fish Catchery factors its accounts receivables immediately at a 1.( percent discount. The average collection period is &' days. !ssume that all accounts are collected in full. :hat is the effective annual interest rate on this arrangement; A. 1-.)1 percent ". 18.%3 percent C. 18.&) percent #. 18.-8 percent $. 10.3' percent <nterest rate for &' days I 3.31(J*1 - 3.31(+ I 3.31(%%8 >umber of periods per year I &)(J&' I 13.-&(%0' $ffective annual rate I 1.31(%%813.-&(%0' - 1 I 1-.)1 percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Accounts recei!able factoring

03. >ew Dor, "an, provides Food Canning5 <nc. a 4%(35333 line of credit with an interest rate of 1.-( percent per .uarter. The credit line also re.uires that 1 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Food Canning5 <nc.7s short-term investments are paying 1.% percent per .uarter. :hat is the effective annual interest rate on this arrangement if the line of credit goes unused all year; !ssume any funds borrowed or invested use compound interest. !. '.-) percent ". '.83 percent C. '.80 percent #. -.33 percent $. -.%- percent $ffective annual interest I *1.31%+' - 1 I '.80 percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: 3ate on unused credit line

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Chapter 18 - Short-Term Finance and Planning

01. The Sports Store has a 41335333 line of credit with City "an,. The loan agreement re.uires that % 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.' percent per .uarter. The Sport Store7s short-term investments are paying 1.( percent per .uarter. :hat is the effective annual interest rate on the line of credit if The Sports Store borrows the entire 41335333 for one year; !ssume any funds borrowed or invested use compound interest. A. (.-% percent ". (.-) percent C. ).33 percent #. ).38 percent $. ).1' percent $ffective annual interest I *1.31'+' - 1 I (.-% percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: 3ate on unused credit line

0%. Dour ban, offers you a 4'35333 line of credit with an interest rate of 1.-( percent per .uarter. The loan agreement also re.uires that % percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Dour shortterm investments are paying 3.%3 percent per month. :hat is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year; !ssume any funds borrowed or invested use compound interest. !. %.33 percent . %.'& percent C. &.18 percent #. -.33 percent $. -.10 percent $ffective annual interest I *1.33%+1% - 1 I %.'& percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: 3ate on unused line of credit

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Chapter 18 - Short-Term Finance and Planning

0&. >ew Town "an, offers you a 4'35333 line of credit with an interest rate of 1.8( percent per .uarter. The loan agreement also re.uires that & 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 .uarter. :hat is the effective annual interest rate on the line of credit if you borrow the entire 4'35333 for one year; !ssume any funds borrowed or invested use compound interest. !. '.'- percent ". '.(8 percent C. -.)1 percent #. -.-8 percent $. 1%.&& percent $ffective annual interest I *1.318(+' - 1 I -.)1 percent

AACSB: Analytic Bloom's: Analysis Difficulty: )ntermediate Learning Ob ecti!e: "#$+ Section: "#%'o(ic: S*ort$term borrowing

0'. Bosie7s Craft Shac, has a beginning cash balance for the .uarter of 4151%). The store has a policy of maintaining a minimum cash balance of 415333 and is willing to borrow funds as needed to maintain that balance. Currently5 the firm has a loan balance of 4'83. Cow much will the store borrow or repay if the net cash flow for the .uarter is -4%83; !. 43 ". 4%8 C. 41%) !. 41(' $. 4%83 Cash deficit I 4151%) - 4%83 - 415333 I -41(' The firm needs to borrow 41('.

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%1 'o(ic: 4inimum cas* balance

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Chapter 18 - Short-Term Finance and Planning

0(. The Cement :or,s has a beginning cash balance for the .uarter of 4-8'. Susie5 the firm7s president5 re.uires that a minimum cash balance of 4833 be maintained and re.uires that borrowing be used to maintain that balance. <f funds have been borrowed5 then she re.uires that those loans be repaid as soon as e1cess funds are available. Currently5 the firm has a loan outstanding of 415%)3. Cow much will the firm borrow or repay this .uarter if the .uarterly receipts are 4&5018 and the .uarterly disbursements are 4&5--'; !. borrow 41) ". borrow 41%8 C. borrow 41'' !. repay 41%8 $. repay 41'' Cash surplus I 4-8' L 4&5018 - 4&5--' - 4833 I 41%8. The firm will repay 41%8 this .uarter.

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%1 'o(ic: S*ort$term financial (lan

0). !t the beginning of the year5 you have an outstanding short-term loan of 4%-' which was used to cover your cash needs for the previous year. The interest e1pense for the year is 410. The pro2ected net cash flow for this year is 41%&5 prior to any payment of principal or interest on this loan. :hat is your anticipated loan balance at year end; !. 41(1 . 41-3 C. 41-) #. 4180 $. 410& Aoan balance I 4%-' L 410 - 41%& I 41-3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$+ Section: "#%1 'o(ic: S*ort$term financial (lan

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Chapter 18 - Short-Term Finance and Planning


Multiple Choice Questions

131. #etails Corp. has a boo, net worth of 4851(3. Aong-term debt is 415)(3. >et wor,ing capital5 other than cash5 is 4%51(3. Fi1ed assets are 4%5333. Cow much cash does the company have; !. 4'5%(3 ". 4'5((3 C. 4(51(3 !. 4(5)(3 $. 4)5-(3 Cash I 4851(3 L 415)(3 - 4%51(3 - 4%5333 I 4(5)(3

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$& Learning Ob ecti!e: "#$+ Section: "#%" 'o(ic: Cas* e6uation

13%. The :a,e-Hp Coffee Company has pro2ected the following .uarterly sales amounts for the coming year

!ccounts receivable at the beginning of the year are 4%33. :a,e-Hp has a )3-day collection period. :hat is the amount of the accounts receivable balance at the end of Fuarter &; !. 4&-( ". 4'(3 C. 4(33 #. 4)33 $. 4-33 !J8 F& end I *)3J03+ 4-(3 I 4(33

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$Learning Ob ecti!e: "#$+ Section: "#%+ 'o(ic: Accounts recei!able balance

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Chapter 18 - Short-Term Finance and Planning

13&. Consider the following financial statement information for the "ulldog <cers Corporation

Cow long is the cash cycle; A. &).) days ". &-.% days C. '1.3 days #. '1.' days $. '%.8 days <nventory turnover I 4(85)&8JK*405&&8 L 4115''%+J%M I (.)'&- times <nventory period I &)(J(.)'&- I )'.)- days 8eceivables turnover I 4015(''JK*4(5)-3 L 4)50'-+J%M I 1'.(11% times 8eceivables period I &)(J1'.(11% I %(.1( days Payables turnover I 4(85)&8JK*4-5)80 L 405'%1+J%M I ).8('% times Payables period I &)(J).8('% I (&.%( days Cash cycle I )'.)- L %(.1( - (&.%( I &).) days

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$1 Learning Ob ecti!e: "#$" Section: "#%& 'o(ic: Cas* cycle

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Chapter 18 - Short-Term Finance and Planning

13'. Dour firm has an average collection period of '% days. Current practice is to factor all receivables immediately at a ' percent discount. !ssume that default is e1tremely unli,ely. :hat is the effective cost of borrowing; !. %8.-0 percent ". &).%3 percent C. &-.-8 percent #. '3.0- percent E. '%.(8 percent >umber of periods I &)(J'% I 8.)03( $!8 I O1 L K3.3'J*1 - 3.3'+M8.)03( - 1 I '%.(8 percent

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$7 Learning Ob ecti!e: "#$+ Section: "#%'o(ic: 0actoring recei!ables

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Chapter 18 - Short-Term Finance and Planning

13(. :or,out Together has pro2ected the following sales for the coming year

Sales in the year following this one are pro2ected to be 18 percent greater in each .uarter. !ssume the firm places orders during each .uarter e.ual to %0 percent of pro2ected sales for the ne1t .uarter. Cow much will the firm pay to its suppliers in Fuarter % if its accounts payable period is )3 days; !. 4%1%.)". 4%%'.&& C. 4%'1.)#. 4%(1.&& $. 4%().)F% payments I *)3J03+ 3.%0 4833 L *&3J03+ 3.%0 4033 I 4%'1.)-

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$# Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: 8ayments

18-8)

Chapter 18 - Short-Term Finance and Planning

13). The Thunder #an7s Corporation7s purchases from suppliers in a .uarter are e.ual to )( percent of the ne1t .uarter7s forecasted sales. The payables period is )3 days. :ages5 ta1es5 and other e1penses are 1) percent of sales5 and interest and dividends are 4)3 per .uarter. >o capital e1penditures are planned. Sales for the first .uarter of the following year are pro2ected at 4-%3. The pro2ected .uarterly sales are

:hat is the amount of the total disbursements for Fuarter %; !. 4()'.%. 4(-0.'& C. 4(8%.1( #. 4(8(.&3 $. 4(03.)Payment of accounts I *)3J03+ 3.)( 4))3 L *&3J03+ 3.)( 4(03 I 4'1&.8& Total disbursements I 4'1&.8& L *3.1) 4))3+ L 4)3 I 4(-0.'&

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$9 Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: 8ayments

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Chapter 18 - Short-Term Finance and Planning

13-. The following is the sales budget for #uc,-n-8un5 <nc.5 for the first .uarter of %330

The accounts receivable balance at the end of the previous .uarter was 4'(5333 *4&%5333 of which was uncollected #ecember sales.+ :hat is the amount of the Banuary collections; !. 411%5'33.33 ". 411%5'38.1) C. 411(5-3&.3& #. 41%%5&().&& $. 41%(5'33.33 Banuary collections I 3.)- 41%35333 L *3.%&J3.&&+ 4&%5333 L 4'(5333 - 4&%5333 I 411(5-3&.3&

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$": Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* collections

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Chapter 18 - Short-Term Finance and Planning

138. Cere are some important figures from the budget of >ashville >ougats5 <nc.5 for the second .uarter of %330

The company predicts that & percent of its credit sales will never be collected5 &) percent of its sales will be collected in the month of sale5 and the remaining )1 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. <n 6arch %3305 credit sales were 4&3%5'335 and credit purchases were 4%%'5)'3. The !pril 1 cash balance was 4'3&5%33. :hat is the cash balance at the end of 6ay; !. 4&'8588". 4&))58') C. 4'1'51'1 #. 4'(-5--E. 4'--5&-' !pril cash balance I 4'3&5%33 L *3.&) 4('-5%33+ L *3.)1 4&3%5'33+ - 4%%'5)'3 - 4(-5%'3 - 41)5'13 - 41105(%3 I 4&))58') 6ay cash balance I 4&))58') L *3.&) 4(-35%'3+ L *3.)1 4('-5%33+ - 4%115)83 - 4)05'%3 41)5'13 - 41&153'3 I 4'--5&-'

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$"" Learning Ob ecti!e: "#$+ Section: "#%, 'o(ic: Cas* budget

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Chapter 18 - Short-Term Finance and Planning

130. Dou7ve wor,ed out a line of credit arrangement that allows you to borrow up to 4(3 million at any time. The interest rate is 3.( percent per month. <n addition5 ( percent of the amount that you borrow must be deposited in a non-interest bearing account. !ssume your ban, uses compound interest on its line of credit loans. :hat is the effective annual interest rate on this lending arrangement; A. ).(3 percent ". ).)% percent C. ).81 percent #. ).8- percent $. ).0' percent 6onthly interest I 4(353335333 *3.33(+ I 4%(35333 !mount received I *1 - 3.3(+ 4(353335333 I 4'-5(335333 Periodic interest I 4%(35333J4'-5(335333 I 3.33(%)& $!8 I *1 L 3.33(%)&+1% - 1 I ).(3 percent

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$"+ Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Cost of borrowing

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Chapter 18 - Short-Term Finance and Planning

113. ! ban, offers your firm a revolving credit arrangement for up to 411( million at an interest rate of % percent per .uarter. The ban, also re.uires you to maintain a compensating balance of ( percent against the unused portion of the credit line5 to be deposited in a noninterest-bearing account. !ssume you have a short-term investment account at the ban, that pays 1.& percent per .uarter5 and assume the ban, uses compound interest on its revolving credit loans. :hat is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year; !. 3 percent ". (.3 percent C. (.% percent !. (.& percent $. (.( percent $!8 I *1 L 3.31&+' - 1 I (.&3 percent

AACSB: Analytic Bloom's: A((lication Difficulty: Basic 2OC 5: "#$", Learning Ob ecti!e: "#$+ Section: "#%'o(ic: Cost of borrowing

18-01