Fundamentals of Corporate Finance, 12e (Ross)
Chapter 18 Short-Term Finance and Planning
1) Which one of the following actions represents a source of cash?
A) Granting credit to a customer
B) Purchasing new machinery
C) Making a payment on a bank loan
D) Purchasing inventory
E) Accepting credit from a supplier
2) Which one of these actions represents a use of cash?
A) Collecting a receivable
B) Paying employee wages
C) Selling inventory for cash
D) Obtaining a bank loan
E) Purchasing inventory on credit
3) Which one of these activities represents a source of cash?
A) Increasing accounts receivable
B) Decreasing inventory
C) Increasing fixed assets
D) Decreasing accounts payable
E) Decreasing common stock
4) Which one of the following actions will increase net working capital? Assume the current
ratio is greater than 1.0.
A) Paying a supplier for a previous purchase
B) Paying off a long-term debt
C) Selling inventory at cost for cash
D) Purchasing inventory on credit
E) Selling inventory at a profit on credit
5) Which one of the following will decrease net working capital? Assume the current ratio is
greater than 1.0.
A) Selling inventory at cost
B) Collecting payment from a customer
C) Paying a dividend to shareholders
D) Selling a fixed asset for less than book value
E) Paying a supplier for prior purchases
6) Which one of these actions will increase the operating cycle? Assume all else held constant.
A) Decreasing the payables period
B) Decreasing the receivables turnover rate
C) Increasing the payables period
D) Decreasing the average inventory level
E) Increasing the inventory turnover rate
7) The operating cycle is equal to the:
A) cash cycle plus the accounts receivable period.
B) inventory period plus the accounts receivable period.
C) inventory period plus the accounts payable period.
D) accounts payable period minus the cash cycle.
E) accounts payable period plus the accounts receivable period.
8) Which one of the following will decrease the operating cycle?
A) Decreasing the inventory turnover rate
B) Decreasing the accounts payable period
C) Increasing the accounts receivable turnover rate
D) Increasing the accounts payable period
E) Increasing the accounts receivable period
9) The operating cycle describes how a product:
A) is priced.
B) is sold.
C) moves through the current asset accounts.
D) moves through the production process.
E) generates a profit.
10) Which one of these affects the length of the cash cycle but not the operating cycle?
A) Inventory period
B) Accounts payable period
C) Both the accounts receivable and inventory periods
D) Accounts receivable period
E) Both the accounts receivable and the accounts payable periods
11) Which one of these will decrease the cash cycle, all else held constant?
A) Increasing the accounts receivable turnover rate
B) Decreasing the accounts payable period
C) Increasing the inventory period
D) Decreasing the inventory turnover rate
E) Increasing the accounts receivable period
12) A decrease in which one of the following will increase the cash cycle, all else held constant?
A) Payables turnover
B) Days sales in inventory
C) Operating cycle
D) Inventory turnover rate
E) Accounts receivable period
13) Metal Designs historically produced products for inventory. Now, they only produce a
product when an actual order is received from a customer. All else equal, this change will:
A) increase the operating cycle.
B) lengthen the accounts receivable period.
C) shorten the accounts payable period.
D) decrease the cash cycle.
E) decrease the inventory turnover rate.
14) Which one of these statements is correct? Assume all else held constant.
A) A decrease in the accounts receivable turnover rate decreases the cash cycle.
B) The cash cycle is equal to the operating cycle minus the inventory period.
C) A negative cash cycle is preferable to a positive cash cycle.
D) A decrease in the accounts payable period shortens the cash cycle.
E) The cash cycle plus the accounts receivable period is equal to the operating cycle.
15) Which one of the following statements is correct concerning the cash cycle?
A) The longer the cash cycle, the more likely a company will need external financing.
B) Increasing the accounts payable period increases the cash cycle.
C) Accepting a supplier’s discount for early payment decreases the cash cycle.
D) The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E) Offering early payment discounts to customers will tend to increase the cash cycle.
16) Which one of the following actions will tend to increase the inventory period?
A) Discontinuing all slow-selling merchandise
B) Selling obsolete inventory below cost just to get rid of it
C) Buying raw materials only as needed for the manufacturing process
D) Producing goods on demand versus for inventory
E) Increasing inventory selection to attract more customers
17) Which one of the following actions will tend to increase the accounts receivable period from
its current 14 days?
A) Tightening the standards for granting credit to customers
B) Refusing to grant additional credit to any customer who pays late
C) Increasing the finance charges applied to all customer balances outstanding over 30 days
D) Granting discounts for cash sales
E) Eliminating the discount for early payment by credit customers
18) An increase in which one of the following is an indicator that an accounts receivable policy
is becoming more restrictive?
A) Bad debts
B) Accounts receivable turnover rate
C) Accounts receivable period
D) Credit sales
E) Operating cycle
19) Assume all else held constant. If you pay your suppliers three days sooner, then:
A) your payables turnover rate will decrease.
B) you may require additional funds from other sources to fund the cash cycle.
C) the cash cycle will decrease.
D) your operating cycle will decrease.
E) the accounts receivable period will decrease.
20) Which one of the following will increase the accounts payable period, all else held constant?
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
21) Which one of the following managers determines which customers must pay cash and which
can charge their purchases?
A) Purchasing manager
B) Credit manager
C) Controller
D) Production manager
E) Payables manager
22) Which one of the following managers determines when a supplier will be paid?
A) Controller
B) Payables manager
C) Credit manager
D) Purchasing manager
E) Production manager
23) 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.
24) The length of time that elapses between the day at item of inventory is purchased and the day
that item sells is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
25) The length of time between the sale of inventory and the collection of the payment for that
sale is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
26) The length of time between the day an item is purchased from a supplier until the day that
supplier is paid for that purchase is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
27) Central Supply paid off an accounts payable for a toboggan it had purchased on credit three
weeks ago. The time period between today and the day Central Supply will receive cash from the
sale of this toboggan is called the:
A) operating cycle.
B) inventory period.
C) accounts receivable period.
D) accounts payable period.
E) cash cycle.
28) Costs that increase as a firm acquires additional current assets are called ________ costs.
A) carrying
B) shortage
C) order
D) safety
E) trading
29) Costs that decrease as a company acquires additional current assets are called ________
costs.
A) carrying
B) shortage
C) debt
D) equity
E) payables
30) A firm with a flexible short-term financial policy will:
A) maintain a low balance in accounts receivables.
B) only have minimal amounts, if any, invested in marketable securities.
C) invest heavily in inventory.
D) have low cash balances.
E) have tight restrictions on granting credit to customers.
31) Which one of these is indicative of a short-term restrictive financial policy?
A) Purchasing inventory on an as-needed basis
B) Granting credit to all customers
C) Investing heavily in marketable securities
D) Maintaining a large accounts receivable balance
E) Keeping inventory levels high
32) If a company adheres to a restrictive short-term financial policy, then they will generally
have:
A) little, if any, investment in marketable securities.
B) low inventory turnover rates.
C) liberal credit terms for customers.
D) few, if any, stockouts.
E) high cash balances.
33) The Lumber Mart recently replaced its management team. As a result, they are implementing
a restrictive short-term financial policy in place of the flexible policy under which they had been
operating. Which one of the following should the employees expect as a result of this policy
change?
A) Increasing monthly sales as compared to the prior year
B) Greater inventory selection
C) Fewer out-of-stock occurrences
D) Loss of credit customers
E) More liberal credit terms
34) A flexible short-term financial policy:
A) increases the need for long-term financing.
B) minimizes net working capital.
C) avoids bad debts by only selling items for cash.
D) maximizes fixed assets and minimizes current assets.
E) is most appropriate when carrying costs are high and shortage costs are low.
35) A flexible short-term financial policy:
A) maximizes cashouts.
B) increases shortage costs due to frequent cash-outs.
C) tends to decrease sales as compared to a restrictive policy.
D) incurs more carrying costs than a restrictive policy.
E) requires only a minimum investment in current assets.
36) Shortage costs are least associated with:
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.
37) The optimal investment in current assets for an active company occurs at the point where:
A) both shortage costs and carrying costs equal zero.
B) shortage costs are equal to zero.
C) carrying costs are equal to zero.
D) carrying costs exceed shortage costs.
E) shortage costs and carrying costs are equal.
38) A company:
A) with a restrictive financing policy secures sufficient long-term financing to fund all its assets.
B) with a flexible financing policy frequently invests in marketable securities.
C) with a flexible financing policy tends to use short-term financing on an ongoing basis.
D) will tend to avoid short-term financing under both restrictive and flexible financing policies.
E) with seasonal sales must select flexible financing policies.
39) Which one of the following statements is correct?
A) Seasonal needs are financed with short-term loans when companies adhere to a flexible
financing policy.
B) A flexible financing policy tends to increase the risk of encountering financial distress.
C) Long-term interest rates tend to be less volatile than short-term rates.
D) Most companies tend to finance inventory with long-term debt.
E) Short-term interest rates are generally higher than long-term rates.
40) Which one of these best describes a characteristic of a flexible financing policy?
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.
41) With a compromise financial policy companies will:
A) borrow only long-term funds and refuse any loans that require compensating balances.
B) borrow short-term funds and also invest in marketable securities.
C) finance all of their assets with various short-term loans.
D) finance their seasonal asset peaks with short-term debt and the remainder of their assets with
equity.
E) finance half of their fixed assets with long-term debt and half with short-term debt.
42) Assume each month has 30 days and a company has a 30-day accounts receivable period.
During the second calendar quarter of the year, that company will collect payment for the sales it
made during which of the following months?
A) February, March, and April
B) April, May and June
C) December, January, and February
D) January, February, and March
E) March, April, and May
43) 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:
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.
44) Timko has a 90-day collection period and produces seasonal merchandise. Sales are lowest
during the first calendar quarter of a year and the highest during the third quarter. The company
maintains a relatively steady level of production which means that its cash disbursements are
fairly equal in all quarters. This company is most apt to face a cash-out situation in:
A) the first quarter.
B) the second quarter.
C) the third quarter.
D) the fourth quarter.
E) any quarter with equal probabilities of occurrence.
45) 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?
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.
46) Which one of the following combinations is most apt to cause a company that is generally
financially sound to have a negative net cash inflow for a particular quarter?
A) Low fixed expenses and level monthly sales
B) A one-time asset purchase and approaching high seasonal sales
C) Highly seasonal sales and a flexible financing policy
D) A flexible financing policy and level monthly sales
E) A large cash sale and low fixed expenses
47) Which one of the following statements is correct concerning a company’s cash balance?
A) Most firms attempt to maintain a zero cash balance at all times.
B) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus
the minimum desired cash balance.
C) On a cash balance report, the cumulative cash surplus at the end of May is used as June’s
beginning cash balance.
D) A cumulative cash deficit indicates a borrowing need.
E) The ending cash balance must equal the minimum desired cash balance.
48) A cumulative cash deficit indicates a company:
A) has at least a short-term need for external funding.
B) is facing long-term financial distress.
C) will go out of business within the year.
D) is capable of funding all of its needs internally.
E) is using its cash wisely.
49) Steve has estimated the cash inflows and outflows for his hardware store for next year. The
report that he has prepared recapping these cash flows is called a:
A) pro forma income statement.
B) sales projection.
C) cash budget.
D) receivables analysis.
E) credit analysis.
50) 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):
A) floor loan.
B) open loan.
C) compensating balance.
D) line of credit.
E) bank note.