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Exam 18: Short-Term Finance and Planning

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Question 1

Multiple Choice

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

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

F) B) and E)
G) A) and C)

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Question 2

Multiple Choice

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Assume each month has 30 days and a firm has a 60-day accounts receivable period. During the second calendar quarter of the year, that firm will collect payment for the sales it made during which of the following months?

A) October, November, and December
B) November, December, and January
C) December, January, and February
D) January, February, and March
E) February, March, and April

F) B) and E)
G) A) and E)

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Question 3

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The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter. No capital expenditures are planned. Sales for the first quarter of the following year are projected at $720. The projected quarterly sales are: What is the amount of the total disbursements for Quarter 2?

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

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

Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length of the inventory period?

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

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

Interior Designs has an inventory period of 46 days, an accounts payable period of 38 days, and an accounts receivable period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days.

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

High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Cross Town Bank. Which one of the following statements correctly describes this transaction?

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

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

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

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

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

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

A compensating balance: I. is required when a firm acquires any bank financing other than a line of credit. II. increases the cost of short-term bank financing. III. may be required even if a firm never borrows funds. IV. is often used as a means of paying for banking services received.

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

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