Question 1

When managers are continually short-term lenders,they are said to follow a:

Accepted Answer

The answer of When managers are continually short-term lenders,they are...

Question 2

A firm starts the week with payables of $172,000,it pays $$80,000 of outstanding bills,and purchases $44,000 of raw materials on one month's credit.What is the change in its cash balance over the week?

Accepted Answer

At the beginning of the week, payables were $172,000. The firm paid $80,000 of outstanding bills, which reduces payables to $92,000 ($172,000 - $80,000).

The firm also purchased $44,000 of raw materials on credit, so payables increase to $136,000 ($92,000 + $44,000).

There is no information given regarding sales or other cash inflows, so we can assume there were none.

Therefore, the change in cash balance is the difference between the beginning payables and ending payables:

$92,000 - $172,000 = -$80,000

The answer is (C) -$80,000, meaning that the firm's cash balance decreased by $80,000 over the week.

Question 3

Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month.It pays for these goods with a 1-month delay? If sales for August are forecast at $10 million and sales for September and October are forecast at $12 million,what will be the forecast cash outflow in September?

Accepted Answer

- For August, Zeta Stores will place orders for 60% of the sales forecast, which amounts to $6 million.
- For September and October, Zeta Stores will place orders for 40% of the sales forecast, which amounts to $4.8 million (($12 million x 40%)/2).
- Since Zeta Stores pays for these goods with a 1-month delay, the forecast cash outflow for September will be the sum of the orders placed for August ($6 million) and half of the orders placed for September and October ($2.4 million).
- Therefore, the forecast cash outflow in September will be $6 million + $2.4 million = $8.4 million. However, since the question specifically asks for the cash outflow for September only, we need to choose the option that corresponds to this amount in the answer choices.
- The only answer choice that is closest to $8.4 million is D) $9.6 million. This is because Zeta Stores will pay for the orders placed in August in September, along with half of the orders placed for September and October, as explained above.

Question 4

Managers who "stretch their payables" are attempting to:

Accepted Answer

Managers who "stretch their payables" are trying to delay paying their bills for as long as possible, which is a form of obtaining short-term financing. They use the funds they owe to suppliers to finance their own operations before they need to pay their bills. This approach allows managers to benefit from the use of funds that would have otherwise gone to pay bills sooner.

Question 5

Which of the following will not reduce an imminent cash shortage?

Accepted Answer

Issuing common stock to repay long-term debt is not an effective way to reduce an imminent cash shortage as it involves a lengthy process of issuing and selling stocks, which may not generate immediate cash. The other options, such as phoning customers with overdue bills, postponing purchases, and rolling over maturing bank debt, can help to reduce cash outflows and improve liquidity in the short term.

Question 6

Before settling on a final short-term financial plan,the manager needs to ask several questions.Which is the odd man out?

Accepted Answer

The other three questions directly relate to short-term financial planning and ensuring adequate cash flow, while estimating EVA (economic value added) is more of a long-term performance measurement.

Question 7

A firm that stretches its payables gains an extra 1 month before it needs to pay for its purchases of raw materials but it loses a 2% discount for prompt payment.This is like borrowing at an effective annual interest rate of:

Accepted Answer

EAR = [1 + (($100 − 98) / $98)]¹² − 1 = 0.2743, or 27.43%

Question 8

Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month.It pays for these goods with a 2-month delay.If sales for August are forecast at $10 million and sales for September and October are forecast at $12 million,what will be the forecast cash outflow in September?

Accepted Answer

Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month. It pays for these goods with a 2-month delay.So, for September, Zeta Stores will pay for the goods ordered in July and August.In July, the sales forecast was $10 million, so Zeta Stores ordered goods worth 60% of $10 million = $6 million.In August, the sales forecast was $12 million, so Zeta Stores ordered goods worth 60% of $12 million = $7.2 million.Therefore, the total forecast cash outflow in September will be $6 million + $7.2 million = $13.2 million.

Question 9

Managers are alerted to projected cash shortages by means of the:

Accepted Answer

Cash budget is a financial statement that summarizes a company's anticipated cash inflows and outflows over a specified period. The cash budget can help management identify and plan for projected cash shortages, making it the best choice in this scenario. The statement of sources and uses of cash and pro forma balance sheet provide valuable financial information but not specifically related to projected cash shortages. Monthly bank statements provide past transaction data but may not provide enough visibility for future cash flow planning.

Question 10

For a recent period,a firm collected $38,200 on accounts receivable,paid $19,700 to suppliers on trade credit,paid $12,000 in cash expenses,purchased for cash a $42,000 piece of equipment that will be depreciated straight-line to zero over 4 years,and had $59,000 of sales of which 15% were cash sales.The firm also paid $13,500 in taxes and interest.The beginning cash balance was $11,300.How much did the firm need to borrow in order to maintain a minimum cash balance of $10,000?

Accepted Answer

Cash balance = $11,300 + 38,200 − 19,700 − 12,000 − 42,000 + (0.15 × $59,000) − 13,500 − 10,000 = −$38,850; Thus, the firm needs to borrow $38,850.

Question 11

Which of the following would increase the firm's cash balance?

Accepted Answer

Increasing accounts payable means that the firm owes more money to its suppliers, which effectively increases the firm's available cash balance. A, C, and D are incorrect choices because they involve increasing expenses or assets that require cash payments, which would decrease the firm's cash balance.

Question 12

The Boat Works started the month with $1.28 million in accounts receivable.Sales for the month were $3.4 million.The firm collects 35% of its sales in the month of sale with the remainder paid the following month.What is the accounts receivable balance at month end?

Accepted Answer

Ending A / R = $1.28m + 3.4m − 1.28m − (0.35 × $3.4m) = $2.21m

Question 13

When the length of the financing is directly related to the life of the asset being financed,the firm is said to follow a:

Accepted Answer

A policy of maturity matching involves aligning the maturity of a firm's debt with the life of its assets. This helps to ensure that the firm's cash inflows from the assets match its outflows to make debt payments. Therefore, when the length of the financing is directly related to the life of the asset being financed, the firm is said to follow a policy of maturity matching.

Question 14

Which statement does not correctly describe short-term financial decisions?

Accepted Answer

Most firms finance their investment in working capital with a mix of short-term and long-term debt, not exclusively with short-term debt.

Question 15

Which one of the following is a use of cash?

Accepted Answer

Repayment of a bank loan is a use of cash as it involves paying out money from the company's cash reserves. Net income, reduction in accounts receivable, and depreciation do not involve actual cash transactions.

Question 16

There are three steps to constructing a cash budget.Which of the following is not one of those steps?

Accepted Answer

The three steps to constructing a cash budget are forecasting sources of cash, forecasting uses of cash, and calculating whether the firm is facing a cash shortage or surplus. Setting a policy for deciding how much time to give customers to pay is not part of constructing a cash budget.

Question 17

Clopton Inc.forecasts cash sales of $18 million in January,$23 million in February and $25 million in March.Credit sales in these three months are forecast at $80 million,$110 million and $145 million.On average 50% of credit sales are paid for in the current month,30% in the next month,and the remainder in the following month.What is the expected cash inflow in March?

Accepted Answer

CF = 25 + (0.5 × 145) + (0.3 × 110) + (0.2 × 80) = $146.5 million

Question 18

In the preparation of cash budgets,capital expenditures are:

Accepted Answer

Capital expenditures are included as a use of cash in the preparation of cash budgets. This is because they represent cash outflows that cannot be avoided and impact the overall cash position of the company. While they are depreciated over time, this does not change the fact that they require cash upfront. Including them in the cash budget can help to ensure that the company has enough cash on hand to cover these expenditures when they are due, even if they are one-time or infrequent expenses. However, including capital expenditures can also make the cash budget lumpy or uneven, since these expenditures may not occur on a regular basis.

Question 19

Which one of the following would not be included as a source of short-term financing?

Accepted Answer

Increasing the minimum operating cash balance is not a source of short-term financing as it refers to a policy decision to maintain a certain level of cash reserves, rather than obtaining additional funds. The other options listed are all methods of obtaining short-term financing.

Question 20

Which one of these is most associated with a disadvantage of the relaxed strategy of long- versus short-term financing?

Accepted Answer

The relaxed strategy involves using more long-term financing, which can lead to unattractive short-term investment income due to lower returns compared to short-term investments.

Quiz 19: Short-Term Financial Planning