Question 1

Which one of these best describes a characteristic of a flexible financing policy?

Accepted Answer

A)  All of a company's assets are financed with long-term debt. 
B)  Only long-term assets are financed with long-term debt. 
C)  Short-term financing will be used to finance seasonal peaks. 
D)  Inventory is purchased with cash. 
E)  Low levels of inventory are maintained. 
A)  All of a company's assets are financed with long-term debt. 
B)  Only long-term assets are financed with long-term debt. 
C)  Short-term financing will be used to finance seasonal peaks. 
D)  Inventory is purchased with cash. 
E)  Low levels of inventory are maintained.

Question 2

A compensating balance:

Accepted Answer

A)  is required when a company acquires any bank financing other than a line of credit. 
B)  is often used by banks as a means of rewarding their best credit customers. 
C)  decreases the cost of short-term bank financing. 
D)  only applies to zero-interest rate loans. 
E)  may be required even if a company never borrows funds. 
A)  is required when a company acquires any bank financing other than a line of credit. 
B)  is often used by banks as a means of rewarding their best credit customers. 
C)  decreases the cost of short-term bank financing. 
D)  only applies to zero-interest rate loans. 
E)  may be required even if a company never borrows funds.

Question 3

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

Accepted Answer

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

Question 4

West Chester Automation has an inventory turnover of 9.1 and an accounts payable turnover of 10.6. The accounts receivable period is 32.8 days. What is the length of the cash cycle?

Accepted Answer

A)  35.67 days 
B)  38.48 days 
C)  41.02 days 
D)  46.47 days 
E)  48.81 days 
A)  35.67 days 
B)  38.48 days 
C)  41.02 days 
D)  46.47 days 
E)  48.81 days

Question 5

Fancy Footwear has a line of credit with a local bank in the amount of $175,000. The loan agreement calls for annual interest of 6.8 percent with a compensating balance of 3 percent of the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs $125,000 to cover expenses for one year?

Accepted Answer

A)  7.01 percent 
B)  7.13 percent 
C)  6.94 percent 
D)  7.17 percent 
E)  7.08 percent 
A)  7.01 percent 
B)  7.13 percent 
C)  6.94 percent 
D)  7.17 percent 
E)  7.08 percent

Question 6

The Bear Rug has sales of $647,000. The cost of goods sold is equal to 66 percent of sales. Accounts receivable has a beginning balance of $53,400 and an ending balance of $49,600. How long on average does it take to collect the receivables?

Accepted Answer

A)  12.56 days 
B)  29.05 days 
C)  18.58 days 
D)  20.44 days 
E)  19.17 days 
A)  12.56 days 
B)  29.05 days 
C)  18.58 days 
D)  20.44 days 
E)  19.17 days

Question 7

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

Accepted Answer

A)  Controller 
B)  Payables manager 
C)  Credit manager 
D)  Purchasing manager 
E)  Production manager 
A)  Controller 
B)  Payables manager 
C)  Credit manager 
D)  Purchasing manager 
E)  Production manager

Question 8

\The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.2 percent. The average collection period is 36 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement?

Accepted Answer

A)  13.02 percent 
B)  13.68 percent 
C)  12.09 percent 
D)  11.78 percent 
E)  12.79 percent 
A)  13.02 percent 
B)  13.68 percent 
C)  12.09 percent 
D)  11.78 percent 
E)  12.79 percent

Question 9

Shortage costs are least associated with:

Accepted Answer

A)  stockouts and cashouts. 
B)  lost customer goodwill. 
C)  disruptions of production schedules. 
D)  inventory ordering costs. 
E)  opportunity costs incurred by high levels of working capital. 
A)  stockouts and cashouts. 
B)  lost customer goodwill. 
C)  disruptions of production schedules. 
D)  inventory ordering costs. 
E)  opportunity costs incurred by high levels of working capital.

Question 10

Duck-n-Run has projected sales of $280,000 for January, $315,000 for February, and $336,000 for March. The company collects 62 percent of sales in the month of sale, 35 percent in the month after sale, and 3 percent two months after sale. The accounts receivable balance at the end of the previous quarter was $9,600. What is the amount of the February collections?

Accepted Answer

A)  $293,300 
B)  $326,970 
C)  $302,900 
D)  $301,333 
E)  $293,588 
A)  $293,300 
B)  $326,970 
C)  $302,900 
D)  $301,333 
E)  $293,588

Question 11

The Harvester collects 55 percent of sales in the month of sale, 40 percent of sales in the month following the month of sale, and 5 percent of sales in the second month following the month of sale. During the month of April, they will collect:

Accepted Answer

A)  55 percent of February sales. 
B)  5 percent of April sales. 
C)  40 percent of March sales. 
D)  5 percent of March sales. 
E)  40 percent of February sales. 
A)  55 percent of February sales. 
B)  5 percent of April sales. 
C)  40 percent of March sales. 
D)  5 percent of March sales. 
E)  40 percent of February sales.

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

A)  accounts receivable financing. 
B)  pledged financing. 
C)  capital funding. 
D)  daily funding. 
E)  capital financing. 
A)  accounts receivable financing. 
B)  pledged financing. 
C)  capital funding. 
D)  daily funding. 
E)  capital financing.

Question 14

TDC's purchases from suppliers in a quarter are equal to 61 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 18 percent of sales, and interest and dividends are $72 per quarter. No capital expenditures are planned. The projected sales for Year 1 are $730, $770, $710, and $850 for Quarters 1 to 4, respectively. Sales for the first quarter of Year 2 are projected at $760. What is the amount of the total disbursements for Quarter 3 of Year 1?

Accepted Answer

A)  $672 
B)  $661 
C)  $649 
D)  $678 
E)  $634 
A)  $672 
B)  $661 
C)  $649 
D)  $678 
E)  $634

Question 15

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

Accepted Answer

A)  A decrease in the inventory period 
B)  An increase in the ending accounts payable balance 
C)  An increase in the cash cycle 
D)  A decrease in the operating cycle 
E)  An increase in the accounts payable turnover rate 
A)  A decrease in the inventory period 
B)  An increase in the ending accounts payable balance 
C)  An increase in the cash cycle 
D)  A decrease in the operating cycle 
E)  An increase in the accounts payable turnover rate

Question 16

The length of time that elapses between the day at item of inventory is purchased and the day that item sells is called the:

Accepted Answer

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

Question 17

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

Accepted Answer

A)  type of collateral used to secure the loan. 
B)  length of the credit period. 
C)  fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured. 
D)  fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured. 
E)  loan's classification as either a committed or a non-committed loan. 
A)  type of collateral used to secure the loan. 
B)  length of the credit period. 
C)  fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured. 
D)  fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured. 
E)  loan's classification as either a committed or a non-committed loan.

Question 18

Summertime Adventures is a seasonal firm that enjoys its highest sales during July and August. The company purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Which one of the following statements is supported by this information?

Accepted Answer

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

Question 19

The Mountain Top Shoppe has sales of $828,000, average accounts receivable of $64,100 and average accounts payable of $72,700. The cost of goods sold is equivalent to 68 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?

Accepted Answer

A)  69.31 days 
B)  68.38 days 
C)  47.13 days 
D)  35.89 days 
E)  36.97 days 
A)  69.31 days 
B)  68.38 days 
C)  47.13 days 
D)  35.89 days 
E)  36.97 days

Question 20

On average, Furniture & More is able to sell its inventory in 54.2 days and takes 65.3 days on average to pay for its purchases. Its average customer pays with a credit card which allows the company to collect its receivables in 2.9 days. Given this information, what is the length of operating cycle?

Accepted Answer

A)  57.1 days 
B)  88.3 days 
C)  −8.2 days 
D)  116.6 days 
E)  122.4 days 
A)  57.1 days 
B)  88.3 days 
C)  −8.2 days 
D)  116.6 days 
E)  122.4 days

Exam 18: Short Term Finance and Planning

Which one of these best describes a characteristic of a flexible financing policy?

A compensating balance:

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

West Chester Automation has an inventory turnover of 9.1 and an accounts payable turnover of 10.6. The accounts receivable period is 32.8 days. What is the length of the cash cycle?

The Bear Rug has sales of $647,000. The cost of goods sold is equal to 66 percent of sales. Accounts receivable has a beginning balance of $53,400 and an ending balance of $49,600. How long on average does it take to collect the receivables?

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

\The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.2 percent. The average collection period is 36 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement?

Shortage costs are least associated with:

The Harvester collects 55 percent of sales in the month of sale, 40 percent of sales in the month following the month of sale, and 5 percent of sales in the second month following the month of sale. During the month of April, they will collect:

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

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

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

The length of time that elapses between the day at item of inventory is purchased and the day that item sells is called the:

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

Summertime Adventures is a seasonal firm that enjoys its highest sales during July and August. The company purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Which one of the following statements is supported by this information?

The Mountain Top Shoppe has sales of $828,000, average accounts receivable of $64,100 and average accounts payable of $72,700. The cost of goods sold is equivalent to 68 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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