Corporate Finance: Core Principles & Apps, 5e (Ross)
Chapter 18 Short-Term Finance and Planning
1) Which one of the following is a source of cash?
A) An increase in inventory
B) An increase in fixed assets
C) A decrease in long-term debt
D) The payment of a cash dividend
E) A decrease in accounts receivable
2) Which one of the following is a use of cash?
A) Acquisition of bank loan
B) Sale of common stock
C) Sale of marketable securities
D) Decrease in accounts payable
E) Decrease in inventory
3) Which one of the following will increase net working capital? Assume the current ratio is
positive.
A) Using cash to pay an accounts payable
B) Using cash to pay a long-term debt
C) Selling inventory at cost
D) Collecting an accounts receivable
E) Using a long-term loan to buy inventory
4) Which one of the following will increase the net working capital of a firm? Assume the current
ratio is positive.
A) Selling a fixed asset
B) Selling inventory at cost for cash
C) Making a payment on a long-term debt
D) Buying inventory on credit
E) Paying an accounts payable
5) Which one of these managers is most apt to determine which supplier should be used as the
source of a production material?
A) Marketing manager
B) Cash manager
C) Purchasing manager
D) Controller
E) Production manager
6) Which one of these managers is most apt to post customer payments to their accounts?
A) Credit manager
B) Controller
C) Cash manager
D) Marketing manager
E) Payables manager
7) Which one of the following will decrease the operating cycle?
A) Paying accounts payable faster
B) Discontinuing the discount given for early payment of an accounts receivable
C) Decreasing the inventory turnover rate
D) Collecting accounts receivable faster
E) Increasing the accounts payable turnover rate
8) Which one of the following will decrease the operating cycle?
A) Decreasing the speed at which inventory is sold
B) Decreasing the accounts receivable turnover rate
C) Decreasing the cash cycle by increasing the accounts payable period
D) Decreasing the accounts payable period
E) Decreasing the days’ sales in inventory
9) Which of the following could be the cause of a lengthening cash cycle?
A) Increasing the inventory turnover
B) Issuing credit to less credit-worthy customers than in previous periods
C) Increasing the accounts payable period
D) Extending the time period before paying a supplier for a credit purchase
E) Offering customers cash discounts for prompt payment
10) Which one of the following will increase the cash cycle?
A) Increasing the cash discounts given to customers who pay their accounts early
B) Having a larger percentage of customers paying with cash instead of credit
C) Paying your suppliers earlier to receive the discount they offer
D) Buying less raw materials to have on hand
E) Ordering raw materials inventory only when you need it rather than ahead of time
11) An increase in which one of the following will decrease the cash cycle, all else equal?
A) Payables turnover
B) Days sales in inventory
C) Operating cycle
D) Inventory turnover rate
E) Accounts receivable period
12) ABC historically acquired products that were held in inventory until they could be sold to a
customer. The firm is now changing its policy and will only acquire a product when it receives an
actual order from a customer. All else equal, this change will
A) increase the operating cycle.
B) shorten the accounts payable period.
C) lengthen the accounts receivable period.
D) decrease the cash cycle.
E) decrease the inventory turnover rate.
13) Which one of the following statements concerning the cash cycle is correct?
A) The cash cycle is equal to the operating cycle minus the inventory period.
B) The most desirable cash cycle is the one that has a small positive value.
C) Granting credit to slower paying customers tends to decrease the cash cycle.
D) The cash cycle plus the accounts receivable period is equal to the operating cycle.
E) A negative cash cycle is actually preferable to a positive cash cycle.
14) Assume all sales and purchases are on credit. Which one of the following statements is correct
concerning the cash cycle?
A) The cash cycle starts when inventory is purchased.
B) The longer the cash cycle, the more likely a firm will need external financing.
C) Increasing the accounts payable period increases the cash cycle.
D) The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E) Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
15) Which one of the following actions will tend to increase the accounts receivable period?
A) Increasing the finance charges applied to all customer balances outstanding over 30 days
B) Increasing the discount for early payment by credit customers
C) Granting discounts for cash sales
D) Loosening the standards for granting credit to customers
E) Refusing credit to all existing and future customers
16) If the accounts receivable balance on a firm’s balance sheet decreases without any change in
credit sales, the operating cycle will
A) increase due to the increased receivables turnover rate.
B) decrease because the number of days’ sales in receivables will decrease.
C) remain constant because credit sales are constant.
D) remain constant because the accounts receivable and inventory periods will be constant.
E) remain constant because cash collections affect the cash cycle, not the operating cycle.
17) For a levered firm, an additional 3-day delay in paying suppliers will
A) reduce the firm’s long-term external financing need.
B) increase the firm’s stock-out costs.
C) increase the cash cycle by 3 days.
D) reduce the operating cycle by 3 days.
E) not affect the cash cycle.
18) The cash cycle includes the time period between the time when
A) inventory is sold and the cash from that sale is received.
B) inventory is purchased and the cash from the sale of that inventory is received.
C) inventory is purchased and when the cash for that purchase is paid to the supplier.
D) the bill for the inventory purchase is received and the payment is made to the supplier.
E) the bill for the inventory is paid and the money from the sale of that inventory is received.
19) Flexible short-term financial policies tend to
A) support few investments in marketable securities.
B) maintain large cash balances.
C) tightly restrict credit sales.
D) maintain low accounts receivable balances.
E) minimize the investment in inventory.
20) A restrictive short-term financial policy tends to
A) grant credit to more customers.
B) reduce total ordering costs as compared to a more flexible policy.
C) encourage credit sales over cash sales.
D) incur more carrying costs than a flexible policy does.
E) reduce future sales more so than a flexible policy.
21) A restrictive short-term financial policy is most associated with both
A) liberal credit terms and large investments in marketable securities.
B) minimal cash balances and large investments in marketable securities.
C) large investments in inventory and accounts receivable.
D) minimal cash balances and credit sales.
E) high credit sales and high cash balances.
22) Which one of these statements is correct?
A) A firm might be able to charge higher prices if it switches from a flexible to a restrictive
short-term financial policy.
B) If a firm adopts a restrictive short-term financial policy, its current assets will be greater than if
it adopts a flexible policy.
C) If a firm switches from a flexible short-term financial policy to a restrictive policy, it is likely to
see an increase in its uncollectible accounts receivable.
D) If a firm switches from a restrictive short-term financial policy to a flexible policy, its operating
cycle will most likely decrease.
E) Future cash flows are expected to be higher if a firm adopts a flexible, rather than a restrictive,
short-term financial policy.
23) A restrictive short-term financial policy, as compared to a more flexible policy, tends to
increase
A) the probability that a firm will face a cash-out situation.
B) the sales of a firm due to the firm’s credit availability and terms.
C) sales due the large amount of inventory on hand.
D) accounts receivable.
E) the ability of a firm to charge premium prices.
24) A flexible short-term financial policy
A) is associated with firms where the carrying costs are considered to be less than the shortage
costs.
B) applies mostly to firms that factor their accounts receivable.
C) applies only to firms that strictly limit their credit sales.
D) tends to decrease the amount of current assets held by a firm.
E) is designed to utilize short-term external financing to fund seasonal increases in current assets.
25) A flexible short-term financial policy
A) increases the likelihood that a firm will face financial distress.
B) increases the probability that a firm will earn high returns on all of its assets.
C) advocates a smaller investment in net working capital than a restrictive policy does.
D) utilizes short-term financing to fund all of the firm’s assets.
E) incurs an opportunity cost due to the rate of return that applies to short-term assets.
26) Shortage costs include
A) all costs that increase with increased current assets.
B) production stoppages due to lack of materials and also lost customer goodwill.
C) increased sales due to inventory selection and increased order costs.
D) increased insurance costs on inventory and an increased rate of return on assets.
E) increased uses of cash for net working capital and stockouts.
27) The total sum of the carrying costs and the shortage costs will be lowest at the point where
A) both the carrying costs and the shortage costs are minimized.
B) the carrying costs exceed the shortage costs.
C) the carrying costs equal the shortage costs.
D) both the carrying costs and the shortage costs are maximized.
E) the shortage costs exceed the carrying costs.
28) Which financial policy, or policies, uses both marketable securities and short-term financing to
fund seasonal variations in asset needs?
A) Both the flexible and the compromise financial policies
B) Flexible financial policy only
C) Compromise financial policy only
D) Restrictive financial policy only
E) Both the restrictive and the compromise financial policies
29) Southern Markets has an accounts receivable period of 30 days. In the first quarter of a
calendar year, the firm’s accounts receivable collections will equal its credit sales for the months
of:
A) December, January, and February.
B) January, February, and March.
C) February, March, and April.
D) February and March.
E) January and February.
30) Your firm collects 20 percent of sales in the month of sale, 65 percent of sales in the month
following the month of sale, and 13 percent of sales in the second month following the month of
sale. The remainder of the sales are uncollectible. Given this, you will collect ________ sales
during the month of May.
A) 65 percent of May
B) 20 percent of March
C) 13 percent of May
D) 65 percent of March
E) 13 percent of March
31) A manufacturing firm has a 90-day collection period. The firm produces seasonal merchandise
and thus has the least sales during the first quarter of a year and the highest level of sales during the
third quarter of a year. The firm maintains a relatively steady level of production which, means that
its cash disbursements are fairly equal in all quarters. Assume all other disbursements are also
equal throughout the year. Assume a 360-day year. The firm is most apt to face a cash-out situation
in
A) the first quarter.
B) the second quarter.
C) the third quarter.
D) the fourth quarter.
E) any quarter, equally.
32) A monthly cumulative cash deficit indicates that a firm
A) is facing long-term financial distress.
B) will go out of business within the year.
C) is using its cash wisely.
D) is capable of funding all of its needs internally.
E) has at least a short-term need for external funding.
33) A prearranged credit agreement with a bank typically open for two or more years is called a
A) letter of credit.
B) revolving credit arrangement.
C) compensating balance.
D) factored loan.
E) cleanup loan.
34) A fraction of the available credit on a loan agreement deposited by the borrower with the bank
in a low or non-interest-bearing account is called a
A) rollover.
B) cleanup loan.
C) letter of credit.
D) factored loan.
E) compensating balance.
35) A short-term loan where the borrower pledges its accounts receivable as security but is still
responsible for any uncollectible account is referred to as
A) a compensating balance.
B) a letter of credit.
C) an assignment.
D) factoring.
E) a repurchase.
36) A type of short-term loan where the borrower sells its accounts receivables to the lender at a
discount to face value is called
A) a compensating balance.
B) an assignment.
C) a letter of credit.
D) factoring.
E) a bond.
37) The most common means of financing a temporary cash deficit is a
A) short-term issue of corporate bonds.
B) short-term secured bank loan.
C) short-term unsecured bank loan.
D) long-term unsecured bank loan.
E) long-term secured bank loan.
38) The primary difference between a line of credit and a revolving credit arrangement is the
A) length of the time period covered by the loan agreement.
B) type of collateral used to secure the loan.
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) fact that the revolving credit arrangement requires a cleanup period but the line of credit does
not.
39) A compensating balance
I. is required when a firm acquires bank financing other than a line of credit.
II. increases the cost of short-term bank financing.
III. represents an opportunity cost to the lending institution.
IV. is often used as a means of paying for banking services received.
A) I and III only
B) II and IV only
C) II and III only
D) I and IV only
E) I, II, and IV only
40) Which one of the following statements is correct?
A) A farmer generally uses a type of financing that employs trust receipts to provide financing
during the growing season.
B) Floor plan arrangements are most applicable to large, easily identifiable types of inventory.
C) A drug store is more apt to have a financing arrangement involving trust receipts than one
involving a blanket lien.
D) A third-party inventory manager is generally involved with the lender and the borrower in a
floor plan arrangement.
E) A direct loan from a bank is generally less expensive than a loan involving commercial paper.
41) A supplier offers credit terms of 2/15, net 45. This means that
A) a 2 percent surcharge will be added to any invoice not paid within 15 days.
B) all purchases must be paid in full within 30 days.
C) a monthly interest rate equal to 2/15ths of one percent will be added to any invoice not paid
within 45 days.
D) a 2 percent discount can be taken if a purchase is paid within 15 days with the full amount due
in 45 days.
E) 2 percent of the invoice must be paid within 15 days with the balance paid within 45 days.
42) Under which type of credit arrangement does a public warehouse act as a control agent?
A) Blanket inventory liens
B) Factored liens
C) Trust receipt financing
D) Field warehouse financing
E) Commercial paper arrangements
43) Assume you are completing a short-term financial plan spreadsheet. The cumulative surplus
will be equal to the
A) ending cash balance minus the minimum cash balance plus the change in short-term debt.
B) minimum cash balance plus the ending cash balance.
C) ending cash balance plus the beginning short-term borrowing plus the change in short-term
debt.
D) ending cash balance minus the minimum cash balance.
E) ending cash balance.
44) Brooke Industries has sales of $938,000 and cost of goods sold of $468,000. The firm had a
beginning inventory of $124,600 and an ending inventory of $132,900. What is the length of the
inventory period?
A) 114.67 days
B) 105.21 days
C) 84.56 days
D) 100.41 days
E) 121.59 days
45) Pat’s Place has sales of $613,700 and cost of goods sold of $338,514. At the beginning of the
year, inventory was $56,509. At the end of the year, the inventory balance was $52,411. What is
the inventory turnover rate?
A) 5.23 times
B) 7.56 times
C) 6.22 times
D) 5.60 times
E) 6.87 times
46) A firm has sales of $914,700. The cost of goods sold is equal to 61 percent of sales. The firm
has an average inventory of $108,200. How many days on average does inventory sit on the shelf
prior to being sold?
A) 52.31 days
B) 76.90 days
C) 65.29 days
D) 70.78 days
E) 43.18 days