CHAPTER 25 –
1
CHAPTER 26
SHORT-TERM FINANCE AND
PLANNING
Answers to Concepts Review and Critical Thinking Questions
1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus,
2. These are firms that have a relatively long time between the time that purchased inventory is paid for
3. a. Use: The cash balance declined by $200 to pay the dividend.
b. Source: The cash balance increased by $500, assuming the goods bought on payables credit
4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will
5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible
6. Shortage costs are those costs incurred by a firm when its investment in current assets is low. There
7. A long-term growth trend in sales will require some permanent investment in current assets. Thus, in
9. Their receivables period increased, thereby increasing their operating and cash cycles.
10. It is sometimes argued that large firms “take advantage of” smaller firms by threatening to take their
11. They would like to! The payables period is a subject of much negotiation, and it is one aspect of the
12. BlueSky will need less financing because it is essentially borrowing more from its suppliers. Among
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.
1. a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised
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
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 = 17,010 + 2,260 + 8,400
Total liabilities and equity = $27,670
3. a. Increase. If receivables go up, the time to collect the receivables would increase, which increases
the operating cycle.
b. Increase. If credit repayment times are increased, customers will take longer to pay their bills,
Beginning receivables
4. a. Increase; Increase. If the terms of the cash discount are made less favorable to customers, the
accounts receivable period will lengthen. This will increase both the cash cycle and the operating
cycle.
b. Increase; No change. This will shorten the accounts payable period, which will increase the cash
cycle. It will have no effect on the operating cycle since the accounts payable period is not part
5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
Sales
680.00
770.00
750.00
920.00
Cash collections
–555.00
–725.00
–760.00
–835.00
Ending receivables
$340.00
$385.00
$375.00
$460.00
CHAPTER 25 –
5
b. A 60-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
(90 – 60)/90 = 1/3 of current sales are collected. So:
Q1
Q2
Q3
Q4
Beginning receivables
$215.00
$453.33
$513.33
$500.00
c. A 30-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
(90 – 30)/90 = 2/3 of current sales are collected. So:
Q1
Q2
Q3
Q4
Beginning receivables
$215.00
$226.67
$256.67
$250.00
Sales
Ending receivables
$226.67
$256.67
$250.00
$306.67
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 = $168,420/[($16,284 + 19,108)/2]
Inventory turnover = 9.5174 times
And the receivables turnover and receivables period are:
Receivables turnover = Credit sales/Average receivables
Receivables turnover = $219,320/[($11,219 + 13,973)/2]
Receivables turnover = 17.4119 times
Sales
Ending receivables
$453.33
$513.33
$500.00
$613.33
CHAPTER 25 –
6
The cash cycle is the operating cycle minus the payables period. The payables turnover and payables
period are:
Payables turnover = COGS/Average payables
Payables turnover = $168,420/[($13,960 + 16,676)/2]
Payables turnover = 10.9949 times
7. a. The payables period is zero since the company pays immediately. Sales in the year following this
one are projected to be 15 percent greater in each quarter. Therefore, Q1 sales for the next year
will be $740(1.15) = $851. The payment in each period is 30 percent of next period’s sales, so:
Q1 Q2 Q3 Q4
b. Since the payables period is 90 days, the payment in each period is 30 percent of the current
period sales, so:
Q1 Q2 Q3 Q4
c. Since the payables period is 60 days, the payment in each period is 2/3 of last quarter’s orders,
plus 1/3 of this quarter’s orders, or:
Quarterly payments = 2/3(.30) times current sales + 1/3(.30) next period sales
8. 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
$1,250.00
$1,355.00
$1,267.50
$1,220.00
Wages, taxes, other expenses
Long-term financing expenses
Total
$1,646.00
$1,797.00
$1,701.50
$1,600.00
9. a. The November sales must have been the total uncollected sales minus the uncollected sales from
December, divided by the collection rate two months after the sale, so:
b. The December sales are the uncollected sales from December divided by the collection rate of
the previous months’ sales, so:
c. The collections each month for this company are:
Collections = .15(Sales from 2 months ago) + .20(Last month’s sales) + .65(Current sales)
10. 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
$354,800
$315,304
$402,517
Cash receipts
Cash collections from credit sales
Total cash available
Cash disbursements
Purchases
Wages, taxes, and expenses
Interest
14,450
Equipment purchases
Total cash disbursements
Ending cash balance
$315,304
$402,517
$597,376
11.
Item
Source/Use
Amount
Cash
Use
–$876
Accounts receivable
Inventories
Property, plant, and equipment
Use
Accounts payable
Accrued expenses
Long-term debt
Use
Common stock
Accumulated retained earnings
12. First, we need to calculate the sales from the last quarter of the previous year. Since 50 percent of the
sales were collected in that quarter, the sales figure must have been:
Sales last quarter of previous year = $84,000,000/(1 – .50)
Sales last quarter of previous year = $168,000,000
Now we can estimate the sales growth each quarter, and calculate the net sales including the seasonal
Beginning receivables
$34.00
$52.50
$45.00
$61.00
13. a. A 45-day collection period means sales collections each quarter are:
Collections = 1/2 current sales + 1/2 old sales
Sales
105.00
90.00
122.00
140.00
Collection of accounts
86.50
97.50
106.00
131.00
Ending receivables
$52.50
$45.00
$61.00
$70.00
Payment of accounts
$43.20
$49.14
$59.76
$57.60
Wages, taxes, and expenses
31.50
27.00
36.60
42.00
Capital expenditures
40.00
Interest & dividends
Total cash disbursements
$80.70
Total cash collections
$86.50
$97.50
Total cash disbursements
80.70
122.14
102.36
105.60
Net cash inflow
$5.80
$25.40
CHAPTER 25 –
10
The company’s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
$32.00
$37.80
$13.16
$16.80
Net cash inflow
5.80
–24.64
3.64
25.40
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
b.
Q1
Q2
Q3
Q4
Beginning cash balance
$15.00
$15.00
$15.00
$15.00
Net cash inflow
5.80
–24.64
3.64
25.40
New short-term investments
–6.14
0
–2.57
–25.45
Income on short-term investments
.34
.46
0
.05
Short-term investments sold
0
23.14
0
0
New short-term borrowing
0
1.04
0
0
Interest on short-term borrowing
0
0
0
Short-term borrowing repaid
0
0
–1.04
0
Ending cash balance
Minimum cash balance
–15.00
–15.00
–15.00
–15.00
Cumulative surplus (deficit)
Beginning short-term investments
$2.57
Ending short-term investments
$23.14
$28.07
Beginning short-term debt
Ending short-term debt
$1.04
Ending cash balance
$37.80
$13.16
$16.80
$42.20
Minimum cash balance
–15.00
–15.00
–15.00
–15.00
Cumulative surplus (deficit)
$22.80
$27.20
14. a. With a minimum cash balance of $20 million, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
$20.00
$20.00
$20.00
$20.00
Net cash inflow
25.40
New short-term investments
Income on short-term investments
Short-term investments sold
18.04
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
Ending cash balance
$20.00
$20.00
$20.00
$20.00
Minimum cash balance
Cumulative surplus (deficit
$0
$0
$0
$0
Beginning short-term investments
$12.00
$18.04
$0
$0
Ending short-term investments
$18.04
$0
$0
$22.53
Beginning short-term debt
$0
$0
$6.24
$2.79
Ending short-term debt
$0
$6.24
$2.79
$0
CHAPTER 25 –
12
b. And with a minimum cash balance of $10 million, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions
Q1
Q2
Q3
Q4
Beginning cash balance
$10.00
$10.00
$10.00
$10.00
Net cash inflow
5.80
–24.64
3.64
25.40
New short-term investments
–6.24
0
–3.72
–25.56
Beginning short-term debt
$0
$0
$0
$0
Ending short-term debt
$0
$0
$0
$0
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $22 invested for 1 quarter earns .02($22) = $.44 in income
Q2: excess funds of $28.24 invested for 1 quarter earns .02($28.24) = $.56 in income
Income on short-term investments
Short-term investments sold
0
24.08
0
0
New short-term borrowing
Interest on short-term borrowing
0
0
0
0
Short-term borrowing repaid
0
0
0
0
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit
$0
$0
$0
$0
Beginning short-term investments
$4.16
$7.89
Ending short-term investments
$4.16
$7.89
15. a. The current assets of Cleveland Compressor are financed largely by retained earnings. From 2018
to 2019, total current assets grew by $7,212. Only $2,126 of this increase was financed by the
growth of current liabilities. Pnew York Pneumatic’s current assets are largely financed by