CHAPTER 18
SHORT-TERM FINANCE AND
PLANNING
Answers to Concept Questions
such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a
relatively long time to pay.
and the time that inventory is sold and payment received. Thus, these are firms that have relatively
short payables periods and/or relatively long receivable cycles.
3. a. Use: The cash balance declined by $200 to pay the dividend.
d. Use: The cash balance declined by $625 to pay for the higher level of inventory.
e. Use: The cash balance declined by $1,200 to pay for the redemption of debt.
4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will
probably increase depending on how close the suppliers are and how well they can estimate need. The
operating cycle will decrease because the inventory period is decreased.
for the cash cycle to be longer than the operating cycle if the accounts payable period is positive.
Moreover, it is unlikely that the accounts payable period would ever be negative since that implies the
firm pays its bills before they are incurred
are two basic types of shortage costs. 1) Trading or order costs. Order costs are the costs of placing an
order for more cash or more inventory. 2) Costs related to safety reserves. These costs include lost
sales, lost customer goodwill and disruption of production schedules.
the real world, net working capital is not zero. Also, the variation across time for assets means that net
working capital is unlikely to be zero at any point in time. This is a liquidity reason.
8. It lengthened its payables period, thereby shortening its cash cycle. It would not affect the operating
cycle.
9. Their receivables period increased, thereby increasing their operating and cash cycles.
business elsewhere. However, considering a move to another supplier to get better terms is the nature
of competitive free enterprise.
price a firm pays its suppliers. A firm will generally negotiate the best possible combination of
payables period and price. Typically, suppliers provide strong financial incentives for rapid payment.
other things, BlueSky will likely need less short-term borrowing from other sources, so it will save on
interest expense.
Solutions to Questions and Problems
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
from the debt offer goes immediately to shareholders.
b. No change. The real estate is paid for by the cash raised from the debt, so this will not change
the cash balance.
c. No change. Inventory and accounts payable will increase, but neither will impact the cash
account.
d. Decrease. The short-term bank loan is repaid with cash, which will reduce the cash balance.
g. No change. Accounts receivable will increase, but cash will not increase until the sales are paid
off.
h. Decrease. The interest is paid with cash, which will reduce the cash balance.
i. Increase. When payments for previous sales, or accounts receivable, are paid off, the cash
different from part a, where debt was raised to make the dividend payment.
l. No change. The short-term note will not change the cash balance.
m. Decrease. The utility bills must be paid in cash.
o. Increase. If marketable securities are sold, the company will receive cash from the sale.
2. The total liabilities and equity of the company are the book value of equity, plus current liabilities and
long-term debt, so:
Total liabilities and equity = $11,640 + 1,580 + 7,100
Total liabilities and equity = $20,320
We have NWC other than cash. Since NWC is current assets minus current liabilities, NWC other than
Current assets = $5,350
the operating cycle.
which will lead to an increase in the operating cycle.
e. Decrease. If the receivables turnover increases, the receivables period decreases.
f. No change. Payments to suppliers affect the accounts payable period, which is part of the cash
cycle, not the operating cycle.
cycle.
b. Increase; No change. This will shorten the accounts payable period, which will increase the cash
c. Decrease; Decrease. If more customers pay in cash, the accounts receivable period will decrease.
d. Decrease; Decrease. Assume the accounts payable period and inventory period do not change.
cash cycle and the operating cycle.
e. Decrease; No change. If more raw materials are purchased on credit, the accounts payable period
will tend to increase, which would decrease the cash cycle. We should say that this may not be
the case. The accounts payable period is a decision made by the company’s management. The
f. Increase; Increase. If more goods are produced for inventory, the inventory period will increase.
5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
(90 – 45)/90 = 1/2 of current sales are collected. So:
Q1
Q2
Q3
Q4
Beginning receivables
$275.00
$230.00
$246.67
$235.00
Sales
690.00
740.00
705.00
780.00
Cash collections
–735.00
–723.33
–716.67
–755.00
Ending receivables
$230.00
$246.67
$235.00
$260.00
6. The operating cycle is the inventory period plus the receivables period. The inventory turnover and
inventory period are:
Inventory turnover = COGS/Average inventory
Inventory turnover = $234,912/[($20,386 + 22,164)/2]
Inventory turnover = 11.0417 times
Inventory period = 365 days/Inventory turnover
Inventory period = 365 days/11.0417
Inventory period = 33.06 days
And the receivables turnover and receivables period are:
Receivables period = 365 days/24.6052
Receivables period = 14.83 days
So, the operating cycle is:
The cash cycle is the operating cycle minus the payables period. The payables turnover and payables
period are:
So, the cash cycle is:
The firm is receiving cash on average 20.96 days after it pays its bills.
7. If we factor immediately, we receive cash on an average of 38 days sooner. The number of periods in
a year are:
Number of periods = 365/38
Number of periods = 9.6053
The EAR of this arrangement is:
EAR = .1562, or 15.62%
8. a. The payables period is zero since the company pays immediately. Sales in the year following this
Payment of accounts $477.00 $408.00 $501.00 $493.35
b. Since the payables period is 90 days, the payment in each period is 30 percent of the current
period sales, so:
Payment of accounts $429.00 $477.00 $408.00 $5018.00
c. Since the payables period is 60 days, the payment in each period is 2/3 of last quarter’s orders,
Payment of accounts $445.00 $454.00 $439.00 $498.45
9. Since the payables period is 60 days, the payables in each period will be:
Payables each period = 2/3 of last quarter’s orders + 1/3 of this quarter’s orders
Payables each period = 2/3(.75) times current sales + 1/3(.75) next period sales
Q1
Q2
Q3
Q4
Payment of accounts
$1,312.50
$1,387.50
$1,472.50
$1,510.00
Wages, taxes, other expenses
342.00
366.00
378.00
422.00
Long-term financing expenses
170.00
170.00
170.00
170.00
Total
$1,824.50
$1,923.50
$2,020.50
$2,102.00
10. a. The November sales must have been the total uncollected sales minus the uncollected sales from
November sales = ($227,000 – 163,000)/.15
November sales = $426,666.67
b. The December sales are the uncollected sales from December divided by the collection rate of
December sales = $163,000/.35
December sales = $465,714.29
c. The collections each month for this company are:
Collections = .15(Sales from 2 months ago) + .20(Last month’s sales) + .65 (Current sales)
March collections = .15($334,000) + .20($386,000) + .65($408,000)
March collections = $392,500.00
11. The sales collections each month will be:
Sales collections = .35(current month sales) + .60(previous month sales)
Given this collection, the cash budget will be:
April
May
June
Beginning cash balance
$265,000
$256,400
$242,500
Cash receipts
Cash collections from
credit sales
403,300
438,900
494,475
Total cash available
$668,300
$695,300
$736,975
Cash disbursements
Purchases
$206,300
$210,800
$278,300
Wages, taxes, and
expenses
62,700
78,500
95,100
Interest
15,100
15,100
15,100
Equipment purchases
127,800
148,400
0
Total cash
disbursements
411,900
452,800
388,500
Ending cash balance
$256,400
$242,500
$348,475
12.
Item
Source/Use
Amount
Cash
Use
–$5,080
Accounts receivable
Source
$7,890
Inventories
Use
–$9,455
Property, plant, and equipment
Use
–$40,520
Accounts payable
Use
–$1,740
Accrued expenses
Source
$870
Long-term debt
Use
–$6,090
Common stock
Source
$3,850
Accumulated retained earnings
Source
$28,055
Remittance = 350($104)
Remittance = $36,400
Remittance = (1 – .01)($36,400)
Remittance = $36,036
c. The implicit interest is the difference between the two remittance amounts, or:
Implicit interest = $36,400 – 36,036
Implicit interest = $364
Days’ credit = 30 – 10
Days’ credit = 20 days