Chapter 19

Questions in [New Questions]
1) According to the text, which of the following managers have a direct influence on the firm's accounts receivable
balance?
I. credit manager
II. production manager
III. payables manager
IV. controller
[A] I only
[B] II only
[C] II and III only
[D] I and IV only
[E] III only
[A] :Correct, but another manager also influences this balance. Review section 19.2.
[B] :This is an incorrect choice. Try again. Review section 19.2.
[C] :Both of these choices are incorrect. Review section 19.2.
[D] :You are correct!
[E] :This is an incorrect choice. Try again. Review section 19.2.
2) Your company has a $100,000 line of credit through a local bank. The bank requires an 8 percent compensating
balance and charges 10 percent on the amount borrowed against the line. If the company needs $55,000 to
purchase inventory, what will the effective interest rate on the loan be? Assume the loan is for a period of one year.
[A] 9.20 percent

[B] 10.11 percent
[C] 10.87 percent
[D] 11.11 percent
[E] 13.13 percent
[A] :In order to get the $55,000 it needs, the firm must borrow $59,783 initially, resulting in an interest cost of $5,978
on the loan. Now, what is the effective interest rate? Review section 19.5.
[B] :In order to get the $55,000 it needs, the firm must borrow $59,783 initially, resulting in an interest cost of $5,978
[C] :You are correct!
[D] :In order to get the $55,000 it needs, the firm must borrow $59,783 initially, resulting in an interest cost of $5,978
[E] :In order to get the $55,000 it needs, the firm must borrow $59,783 initially, resulting in an interest cost of $5,978
3) A cash budget is a forecast of cash receipts and disbursements for the next planning period.
[A] True
[B] False
[A] :You are correct!

[B] :This is a correct definition of a cash budget. Review section 19.4.
4) Which of the following questions are considered a part of short-term finance?

I. How much credit should be extended to customers?
II. What is a reasonable level of cash for the firm to maintain?
III. How much of the firm's current income should be paid out as dividends?
IV. Should the firm issue commercial paper or obtain a bank loan?
[A] I and IV only

[B] II and III only
[C] I, II, and IV only
[D] II, III, and IV only
[E] I, II, and III only
[A] :Correct, but isn’t the level of cash also a short-term financing consideration? Review the introduction to chapter
19.
[B] :One of these choices is incorrect. Review the introduction to chapter 19.
[D] :One of these choices is incorrect. Review the introduction to chapter 19.
[E] :One of these choices is incorrect. Review the introduction to chapter 19.
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5) All else being equal, which of the following would increase the length of a firm's cash cycle? Consider each in
isolation of one another.
I. increasing the inventory turnover rate
II. increasing the accounts receivable period
III. decreasing the accounts payable period
[A] I only
[B] II only
[C] III only
[D] I and III only
[E] II and III only
[A] :An increase in the inventory turnover rate means the inventory period shortens, which definitely would not
lengthen the cash cycle. Review section 19.2.
[B] :Correct, but there is at least one more correct option. Review section 19.2.
[C] :Correct, but there is at least one more correct option. Review section 19.2.
[D] :An increase in the inventory turnover rate means the inventory period shortens, which definitely would not
lengthen the cash cycle. Review section 19.2.
[E] :You are correct!
6) A _____ short-term financial policy increases the opportunity cost of holding liquid assets.
[A] flexible
[B] restrictive
[C] neutral
[D] just-in-time
[E] zero net working capital

[B] :Since a restrictive policy results in a lower amount of liquid assets being held, the opportunity costs of holding
liquid assets is actually lower. Review section 19.3.
[C] :This policy does not increase the carrying costs of holding liquid assets. Review section 19.3.
[D] :This policy does not increase the carrying costs of holding liquid assets. Review section 19.3.
[E] :This policy does not increase the carrying costs of holding liquid assets. Review section 19.3.
7) The _____ is the period of time between cash disbursement and cash collection.
[A] accounts payable period

[B] cash cycle
[C] accounts receivable period
[D] inventory period
[E] operating cycle
[A] :This is the amount of time between acquisition of inventory and payment for it. Review section 19.2.
[B] :You are correct!
[C] :This is the amount of time between the sale of inventory and when cash is collected on the receivable created.
Review section 19.2.
[D] :This is the amount of time it takes to sell inventory once it has been acquired. Review section 19.2.
[E] :This is the amount of time that elapses between when inventory is received and when payment is received for
the sale of inventory. Review section 19.2.
8) According to the text, which of the following managers have a direct influence on a firm's inventory holdings?
I. cash manager
IV. purchasing manager
[A] I only
[B] II only
[C] II and IV only
[D] I and III only
[E] III only
[A] :This is an incorrect choice. Try again. Review section 19.2.

[B] :Correct, but someone else also affects the level of the inventory. Review section 19.2.
[D] :Both of these choices are incorrect. Review section 19.2.
[E] :This is an incorrect choice. Try again. Review section 19.2.
9) Which one of the following is a source of cash, all else equal?
[A] retiring commercial paper

[B] reducing accounts payable
[C] factoring accounts receivable
[D] selling inventory for its book value on credit
[E] renewing a committed line of credit at a bank
[A] :A decrease in a liability is a use of cash. Review section 19.1.

[B] :A decrease in a liability is a use of cash. Review section 19.1.
[D] :Since this just exchanges accounts receivable for inventory it is not a source of cash. Review section 19.1.
[E] :This is not a source of cash because there is no net change in borrowing ability. Review section 19.1.
10) For the year just ended, James' Drafting Supplies had average accounts receivable of $880,000 from total credit
sales of $4,800,000 for the year. Throughout the year, a factor purchased accounts receivable from the firm at a 2
percent discount. What was the firm's effective interest rate?
[A] 2.0 percent

[B] 10.4 percent
[C] 11.2 percent
[D] 11.6 percent
[E] 12.9 percent
[A] :To begin, you must first find the average collection period. Did you get 66.9 days? Furthermore, the cost of
financing is .02/.98 = 2.041 percent per 66.9 day period. Now convert this into an effective annual rate. Review
section 19.5.
[B] :To begin, you must first find the average collection period. Did you get 66.9 days? Furthermore, the cost of
section 19.5.
[C] :To begin, you must first find the average collection period. Did you get 66.9 days? Furthermore, the cost of
section 19.5.
[E] :To begin, you must first find the average collection period. Did you get 66.9 days? Furthermore, the cost of
section 19.5.
11) According to the text, the _____ is generally responsible for making credit policy decisions.
[A] production manager

[B] controller
[C] marketing manager
[D] cash manager
[E] payables manager
[A] :This manager is generally responsible for setting production schedules and materials requirements. Review
section 19.2.
[B] :This manager performs more of an information and reconciliation function than an actual decision-making
function. Review section 19.2.
[D] :This manager is generally responsible for the collection, concentration, and disbursement of cash in addition to
managing short-term borrowing relationships. Review section 19.2.
[E] :This manager generally deals with decisions concerning payment policies and taking discounts offered. Review
section 19.2.
12) The payment by a firm for goods or services provided by a supplier is a:
[A] capital expenditure.

[B] payment of wages and related expenses.
[C] payment of long-term financing expenses.
[D] receipt of payment on an account receivable.
[E] payment of accounts payable.
[A] :This is not the definition of a capital expenditure. Review section 19.2.
[B] :Payments to suppliers do not result from wages and related expenses. Review section 19.2.
[C] :Payments to suppliers are not a long-term financing cost. Review section 19.2.
[D] :Collection on a receivable is a cash inflow, not an outflow. Review section 19.2.
13) The optimal investment in current assets occurs when the carrying costs of current assets are just equal to the
shortage costs.
[A] True
[B] False

[B] :Review the figures in section 19.3.
14) On May 15, your firm receives 20 cases of designer pens. On June 30, your firm pays $3,250 for the pens. On
July 15, the pens are sold on credit for $10,500. On September 10, your firm collects the receivable in full. If each
transaction occurs at the end of the business day, how many days are in the accounts payable period?
[A] 46 days
[B] 57 days
[C] 61 days
[D] 72 days
[E] 118 days

[B] :This is the number of days in the accounts receivable period. Review section 19.2.
[C] :This is the number of days in the inventory period. Review section 19.2.
[D] :This is the number of days in the cash cycle. Review section 19.2.
[E] :This is the number of days in the operating cycle. Review section 19.2.
15) If a lender takes a trust receipt, it has a blanket lien against all of the borrower's inventories.
[A] True
[B] False
[A] :With a trust receipt, the borrower holds only specific inventory in trust for the lender. Review section 19.5.
16) Jumbo, Inc. had sales of $8,000 in November, $14,000 in December, and projects sales of $10,000 in January,
$12,000 in February, and $8,000 in March. The firm's COGS in any given month is equal to 70 percent of the next
month's sales. The firm collects its receivables in 60 days and pays its payables in 30 days. The firm begins January
1 with $10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What are
Jumbo's total cash collections in March? Assume there are 30 days in every month.
[A] $10,000
[B] $11,000
[C] $11,600
[D] $12,100
[E] $13,000

[B] :Is this what you sold in January? Review section 19.4.
[C] :Is this what you sold in January? Review section 19.4.
[D] :Is this what you sold in January? Review section 19.4.
[E] :Is this what you sold in January? Review section 19.4.
1 with 10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What is Jumbo's
cash balance at the end of February? Assume there are 30 days in every month.
[A] $12,000
[B] $13,600
[C] $14,200
[D] $16,600
[E] $19,100
[A] :You need to review this calculation in section 19.4.

[B] :You need to review this calculation in section 19.4.
[C] :You need to review this calculation in section 19.4.
[E] :You need to review this calculation in section 19.4.
18) Managing short-term cash flows involves minimizing costs.
[A] True
[B] False

[B] :The objective is to find the optimal trade-off between shortage and carrying costs. Review section 19.3.
19) Under a restrictive short-term financial policy, a firm keeps large balances of cash and marketable securities.
[A] True
[B] False
[A] :Large balances of cash and marketable securities reflect a flexible policy. Review section 19.3.
20) Assume you are the financial manager for a firm that has a loan arrangement with First County Bancorp. The
loan terms contain a _____ which specifies your firm must maintain an average daily balance of $90,000 in a non-
interest-bearing account.
[A] collateral requirement

[B] line-of-credit security arrangement
[C] commitment requirement
[D] zero balance agreement
[E] compensating balance requirement
[A] :This term does not describe the requirement of maintaining a balance in a low-interest account as a part of a
loan agreement. Review section 19.5.
[B] :This term does not describe the requirement of maintaining a balance in a low-interest account as a part of a
[C] :This term does not describe the requirement of maintaining a balance in a low-interest account as a part of a
[D] :This term does not describe the requirement of maintaining a balance in a low-interest account as a part of a
21) A compensating balance requirement reduces the cost of a loan to a borrower.
[A] True
[B] False
[A] :A compensating balance requirement increases the cost of a loan to a borrower. Review section 19.5.
22) Shortage costs are costs that rise with increases in investment in current assets.
[A] True
[B] False
[A] :Shortage costs are costs that fall with increases in the investment in current assets. Review section 19.3.
1 with $10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What is Jumbo's
accounts receivable at the end of January? Assume there are 30 days in every month.
[A] $10,000
[B] $14,000
[C] $22,000
[D] $24,000
[E] $32,000
[A] :It takes customers 60 days, or 2 months, to pay for their purchases. Have they paid for what they bought in
January? Have they paid for their December purchases? How about the November purchases? Review section 19.4.
[B] :It takes customers 60 days, or 2 months, to pay for their purchases. Have they paid for what they bought in
January? Have they paid for their December purchases? How about the November purchases? Review section 19.4
[C] :It takes customers 60 days, or 2 months, to pay for their purchases. Have they paid for what they bought in
[E] :It takes customers 60 days, or 2 months, to pay for their purchases. Have they paid for what they bought in
24) Suppose that the inventory period is 200 days, the accounts payable period is 100 days, and accounts receivable
are collected, on average, in 45 days. What is the cash cycle?
[A] 58 days
[B] 145 days
[C] 152 days
[D] 162 days
[E] 238 days
[A] :The cash cycle is equal to the operating cycle minus the accounts payable period. Review section 19.2.
[C] :The cash cycle is equal to the operating cycle minus the accounts payable period. Review section 19.2.
[D] :The cash cycle is equal to the operating cycle minus the accounts payable period. Review section 19.2.
[E] :The cash cycle is equal to the operating cycle minus the accounts payable period. Review section 19.2.
25) A firm which successfully employs a _____ short-term financial policy will probably decrease its risk of default
and/or inventory stockouts.
[A] flexible
[B] restrictive
[C] neutral
[D] just-in-time
[E] zero net working capital

[B] :A restrictive short-term financial policy increases the risk of default and/or inventory stockouts. Review section
19.3.
[C] :A neutral short-term financial policy does not decrease the risk of default and/or inventory stockouts. Review
section 19.3.
[D] :This policy will not decrease the risk of default and/or inventory stockouts. Review section 19.3.
[E] :This policy will not decrease the risk of default and/or inventory stockouts. Review section 19.3.
26) Suppose that the inventory period is 50 days, the accounts payable period is 35 days, and the cash cycle is 55
days. What is the operating cycle?
[A] 35 days
[B] 40 days
[C] 85 days
[D] 90 days
[E] 105 days
[A] :The operating cycle is the sum of the accounts payable period and the cash cycle. Review section 19.2.
[B] :The operating cycle is the sum of the accounts payable period and the cash cycle. Review section 19.2.
[C] :The operating cycle is the sum of the accounts payable period and the cash cycle. Review section 19.2.
[E] :The operating cycle is the sum of the accounts payable period and the cash cycle. Review section 19.2.
27) Which one of the following is a use of cash, all else equal?
[A] increasing accounts payable

[B] factoring accounts receivable
[C] reducing inventory by increasing sales
[D] reducing short-term loan balances
[E] canceling the need for a compensating balance
[A] :An increase in a liability is a source of cash. Review section 19.1.

[B] :A decrease in an asset is a source of cash. Review section 19.1.
[C] :A decrease in an asset is a source of cash. Review section 19.1.
[E] :This would be a source of cash. Review section 19.5.
28) According to the text, the _____ is generally responsible for making short-term investment and borrowing
decisions and for maintaining banking relations.
[A] production manager

[B] controller
[C] credit manager
[D] cash manager
[A] :This manager is generally responsible for setting production schedules and materials requirements. Review
section 19.2.
[B] :This manager performs more of an information and reconciliation function than an actual decision-making
[C] :This manager is generally responsible for the monitoring and control of accounts receivable. Review section
19.2.
section 19.2.
29) A firm which employs a restrictive short-term financial policy will have a relatively:
[A] high ratio of current assets to sales.

[B] high amount of marketable securities.
[C] high amount of short-term debt relative to long-term debt.
[D] high amount of long-term debt.
[E] low amount of short-term debt.
[A] :A firm with a restrictive policy will have a relatively low amount of current assets to sales. Review section 19.3.
[B] :With a restrictive policy, a firm is less likely to have excess cash that must be invested in marketable securities.
[D] :With a restrictive policy, a firm is more likely to finance its current assets using more short-term debt and less
long-term debt. Review section 19.3.
[E] :A firm will tend to have a higher amount of short-term debt under a restrictive policy. There is a better answer.
30) Short-term financial decisions are typically defined as the cash inflows and outflows that occur within _____
year(s) or less.
[A] one
[B] two
[C] three
[D] four
[E] five

[B] :Short-term financial decisions relate to cash flows occurring within one year or less. Review the introduction to
chapter 19.
[C] :Short-term financial decisions relate to cash flows occurring within one year or less. Review the introduction to
chapter 19.
[D] :Short-term financial decisions relate to cash flows occurring within one year or less. Review the introduction to
chapter 19.
[E] :Short-term financial decisions relate to cash flows occurring within one year or less. Review the introduction to
chapter 19.
31) The cash cycle is the time between when inventory is:
[A] acquired and when it is actually paid for.

[B] paid for and when the cash is collected from its sale.
[C] acquired and when cash is received for the sale.
[D] paid for and when it is sold.
[E] acquired and when it is actually sold.
[A] :This defines the accounts payable period. Review section 19.2.
[C] :This defines the operating cycle. Review section 19.2.
[D] :There is no definition for this period. Review section 19.2.
[E] :This defines the inventory period. Review section 19.2.
transaction occurs at the end of the business day, how many days are in the operating cycle?
[A] 46 days
[B] 57 days
[C] 61 days
[D] 72 days
[E] 118 days
[A] :This is the number of days in the accounts payable period. Review section 19.2.
33) A firm's balance sheet is comprised of cash, other current assets, fixed assets, current liabilities, long-term debt,
and equity. Which one of the following correctly describes net working capital?
[A] Cash - Current liabilities

[B] Cash + Other current assets + Current liabilities
[C] Current assets - Cash - Fixed assets + Long-term debt
[D] Current assets - Current liabilities
[E] Long-term debt + Equity - Current assets
[A] :Net working capital relates to current accounts. Now try again. Review section 19.1.
[B] :Net working capital relates to current accounts. Now try again. Review section 19.1.
[C] :Net working capital relates to current accounts. Now try again. Review section 19.1.
[E] :Net working capital relates to current accounts. Now try again. Review section 19.1.
34) Under a restrictive short-term financial policy, a firm makes small investments in inventory.
[A] True
[B] False

[B] :The goal is to maintain only the minimally necessary investment in current assets. Review section 19.3.
35) The _____ is the period of time between the receipt of inventory and the payment for it.
[A] accounts receivable period

[B] inventory period
[C] accounts payable period
[D] cash cycle
[E] operating cycle
[A] :This period is unrelated to the time it takes to pay for inventory once it is acquired. Review section 19.2.
[B] :This period is unrelated to the time it takes to pay for inventory once it is acquired. Review section 19.2.
[D] :The cash cycle begins once the inventory is paid for. Review section 19.2.
[E] :The period of time between the receipt of inventory and payment for it is just a part of the operating cycle.
36) Which of the following fall under the heading of short-term financial planning?
I. increasing inventory to improve responsiveness to customer requests
II. taking steps to shorten the collection period
III. making it easier for customers to purchase on credit
IV. replacing a three-year unsecured loan with a less expensive three-year secured loan
[A] I and III only

[B] II and IV only
[C] I and II only
[D] I, III, and IV only
[A] : Correct, but isn’t the collection period also a short-term financing consideration? Review the introduction to
chapter 19 as well as section 19.2.
[B] :One of these choices does not affect either short-term assets or short-term liabilities. Review the introduction to
chapter 19.
[C] :Correct, but isn’t accounts receivable also a short-term financing consideration? Review the introduction to
chapter 19.
[D] :One of these choices does not affect either short-term assets or short-term liabilities. Review the introduction to
chapter 19.
37) The length of time between when inventory is purchased and when cash is collected on the sale of the inventory
is called the:
[A] inventory period.

[B] accounts receivable period.
[C] accounts payable period.
[D] cash cycle.
[E] operating cycle.
[A] :The inventory period ends when the receivable is created. Review section 19.2.
[B] :The accounts receivable period is only a part of the period of time between when inventory is purchased and
when cash is collected on the sale. Review section 19.2.
[C] :The accounts payable period ends when payment is made on the payable. Review section 19.2.
[D] :The cash cycle begins when the account payable is paid. Review section 19.2.
38) Suppose that the inventory period is 50 days, the accounts receivable period is 40 days, and the accounts
payable period is 35 days. What is the cash cycle?
[A] 25 days
[B] 45 days
[C] 55 days
[D] 90 days
[E] 135 days
[A] :The cash cycle is the operating cycle minus the accounts payable period. How many days are there in the
operating cycle? Review section 19.2.
[B] :The cash cycle is the operating cycle minus the accounts payable period. How many days are there in the
[D] :The cash cycle is the operating cycle minus the accounts payable period. How many days are there in the
[E] :The cash cycle is the operating cycle minus the accounts payable period. How many days are there in the
39) Which of the following would move a firm toward a flexible short-term financial policy?
I. increasing the credit restrictions for accounts receivable
II. decreasing the level of investment in inventory
III. increasing the investment in marketable securities
[A] I only
[B] II only
[C] III only
[D] I and II only
[E] I and III only
[A] :This action would make the firm's short-term financial policy more restrictive. Review section 19.3.
[B] :This action would make the firm's short-term financial policy more restrictive. Review section 19.3.
[D] :Both of these actions would make the firm’s short-term financial policy more restrictive. Review section 19.3.
[E] :At least one of these choices is incorrect. Review section 19.3.
40) According to the text, the _____ is generally responsible for the collection and dissemination of accounting
information on cash flows.
[A] credit manager

[B] controller
[C] marketing manager
[D] cash manager
[A] :This manager is generally responsible for the monitoring and control of accounts receivable. Review section
19.2.
[C] :This manager generally makes credit policy decisions. Review section 19.2.
[D] :This manager is generally responsible for the collection, concentration, and disbursement of cash in addition to
managing short-term borrowing relationships. Review section 19.2.
section 19.2.
41) A firm is not considered healthy unless its accounts payable period exceeds its operating cycle.
[A] True
[B] False
[A] :This would imply a negative cash cycle. How many firms have a negative cash cycle? Review section 19.2.
42) Melons 'R' Us, a national chain of fruit stands, has an inventory period of 65 days, an accounts payable period of
30 days, and accounts receivable are collected, on average, in 24 days. The CFO plans to implement a discount plan
in order to reduce the time it takes to collect receivables to 18 days. What will happen to the firm's cash cycle?
[A] It will fall from 89 days to 83 days.

[B] It will fall from 59 days to 53 days.
[C] It will be unaffected by the change in policy.
[D] It will fall from 71 days to 65 days.
[E] It will rise from 71 days to 77 days.
[A] :Before the change, the firm's operating cycle is 89 days long, making its cash cycle 59 days long, so this
response can't be correct. Review section 19.2.
[C] :If the accounts receivable period is shortened, the cash cycle will be as well. Review section 19.2.
[D] :Before the change, the firm's operating cycle is 89 days long, making its cash cycle 59 days long, so this
[E] :Before the change, the firm's operating cycle is 89 days long, making its cash cycle 59 days long, so this
43) Most firms have a positive cash cycle.
[A] True
[B] False

[B] :Having a negative cash cycle would mean that suppliers provide free financing for the buyer’s business. Review
section 19.2.
44) The _____ is the period of time required for the firm to acquire inventory, convert it into finished goods, and sell it.

[B] cash cycle
[D] inventory period
[E] operating cycle
[A] :This period is not affected by the amount of time it takes to sell the inventory once it is acquired. Review section
19.2.
[B] :This period measures the time it takes for cash to flow in once it has flowed out of the firm. Review section 19.2.
[C] :This period measures the time it takes for a firm to pay for its inventory once it has been acquired. Review
section 19.2.
[E] :This period is not limited to the time required for the firm to acquire inventory, convert it into finished goods, and
sell it. Review section 19.2.
45) A type of inventory financing in which a third party to the lending arrangement typically acts as a control agent to
supervise the inventory for the lender is called:
[A] blanket inventory lien financing.

[B] field warehouse financing.
[C] trust receipt financing.
[D] secured lending.
[E] factoring.
[A] :This type of financing does not require the use of a third party. Review section 19.5.
[C] :This type of financing does not require the use of a third party. Review section 19.5.
[D] :This type of financing does not require the use of a third party. Review section 19.5.
[E] :This type of financing does not require the use of a third party. Review section 19.5.
46) As the level of investment in current assets increases, _____ will likely rise.
[A] current costs

[B] shortage costs
[C] carrying costs
[D] monitoring costs
[E] operating costs
[A] :Regardless of how you define current costs in this case, there is a better choice. Review section 19.3.
[B] :If current assets increase, shortage costs fall. Review section 19.3.
[D] :Since the chance of stockout decreases as the investment in current assets increases, monitoring will become
less of a problem. Review section 19.3.
[E] :Regardless of how you define operating costs in this case, there is a better choice. Review section 19.3.
47) Which one of the following is true?
[A] The inventory period of the operating cycle ends when the receivable it creates is actually paid by the customer.
[B] The length of the operating cycle is always greater than or equal to the length of the cash cycle.
[C] The accounts receivable period is always greater than or equal to the length of the cash cycle.
[D] The inventory period plus the accounts receivable period is equal in length to the operating cycle plus the cash
cycle.
[E] The accounts payable period ends when the inventory is sold.
[A] :The inventory period ends when the receivable is created. Review section 19.2.
[C] :The accounts receivable period can be shorter than the cash cycle. Review section 9.2.
[D] :The operating cycle is equal in length to the inventory period plus the accounts receivable period. Review
section 19.2.
[E] :The accounts payable period ends when payment is made on the payable. Review section 19.2.
48) A firm which needs to raise cash and also reduce the level of its accounts receivable would most likely benefit
from:
[A] obtaining an unsecured short-term loan.

[B] applying for a committed line of credit.
[C] assigning its receivables on a short-term loan.
[D] factoring its receivables.
[E] securing any short-term credit with a blanket inventory lien.
[A] :This will not reduce the level of accounts receivable. Review section 19.5.
[B] :This will not reduce the level of accounts receivable. Review section 19.5.
[C] :This will not reduce the level of accounts receivable. Review section 19.5.
[E] :This will not reduce the level of accounts receivable. Review section 19.5.
49) The longer the cash cycle, the more financing a firm requires.
[A] True
[B] False

[B] :This means the firm has a longer period between its cash outflows and its cash inflows, meaning this difference
must be financed. Review section 19.2.
accounts payable at the end of January? Assume there are 30 days in every month.
[A] $5,600
[B] $7,000
[C] $8,400
[D] $9,200
[E] $11,100
[A] :Since the payables period is 30 days, the A/P balance will equal January purchases. How much was purchased
in January? Review section 19.4.
[B] :Since the payables period is 30 days, the A/P balance will equal January purchases. How much was purchased
[D] :Since the payables period is 30 days, the A/P balance will equal January purchases. How much was purchased
[E] :Since the payables period is 30 days, the A/P balance will equal January purchases. How much was purchased
51) Which one of the following questions pertains to short-term financial planning?
[A] Should a manufacturing plant be expanded to increase production capacity?

[B] How much money should a firm pay in interest expense each year?
[C] How much of a firm's current income should be paid out as dividends?
[D] Should a firm offer straight bonds or convertible bonds?
[E] How much money should a firm raise by issuing commercial paper?
[A] :This relates to capital budgeting which is not a part of short-term finance. Review the introduction to chapter 19.
[B] :This question relates to the firm's financing decision and is not a part of short-term finance. Review the
introduction to chapter 19.
[C] :This question relates to the firm's financing decision and is not a part of short-term finance. Review the
[D] :This question relates to the firm's financing decision and is not a part of short-term finance. Review the
52) According to the text, which of the following managers have a direct influence on the firm's accounts payable
balance?
I. credit manager
IV. controller
[A] I only
[B] II only
[C] I, III, and IV only
[E] I and IV only
[A] :The credit manager deals with accounts receivable only. Review section 19.2.
[B] :Correct, but at least one other response is correct as well. Review section 19.2.
[C] :At least one of these managers does not have a direct influence on the firm's accounts payable balance. Review
section 19.2.
[E] :At least one of these managers does not have a direct influence on the firm's accounts payable balance. Review
section 19.2.
53) For the year just ended, James' Drafting Supplies had average accounts receivable of $880,000 from total credit
sales of $4,800,000 for the year. Throughout the year, a factor purchased accounts receivable from the firm at a 2
percent discount. What was the firm's accounts receivable period?
[A] 61 days
[B] 65 days
[C] 67 days
[D] 71 days
[E] 74 days
[A] :The fact that the receivables are factored here does not impact on the firm's sales in receivables. Review section
19.5.
[B] :What is the receivables turnover rate? Review section 19.5.
[D] :The fact that the receivables are factored here does not impact on the firm's sales in receivables. Review section
19.5.
[E] :What is the receivables turnover rate? Review section 19.5.
54) According to the text, the _____ generally deals with decisions concerning payment policies and taking discounts
offered.
[A] credit manager

[B] controller
[C] purchasing manager
[D] cash manager
[A] :This manager does not deal with accounts payable. Review section 19.2.
[B] :This manager performs more of an information and reconciliation function than an actual decision making
[C] :This manager may negotiate payment terms but generally does not deal with the actual payment decision.
[D] :This manager does not deal with accounts payable. Review section 19.2.
55) The operating cycle minus the cash cycle leaves the accounts payable period.
[A] True
[B] False

[B] :The operating cycle is the sum of the cash cycle and the accounts payable period. Review section 19.2.
56) The _____ is the period of time required for the firm to acquire inventory, sell the finished goods, and collect the
proceeds.

[C] operating cycle
[D] cash cycle
[E] accounts payable period
[A] :This period is not affected by the amount of time it takes to sell the inventory once it is acquired. Review section
19.2.
[B] :This period is not affected by the amount of time it takes to collect on a receivable. Review section 19.2.
[D] :This period measures the time it takes for cash to flow in once it has flowed out of the firm. Review section 19.2.
[E] :This period measures the time it takes for a firm to pay for its inventory once it has been acquired. Review
section 19.2.
57) All else equal, which one of the following actions is most apt to increase the cash balance of a firm?
[A] reducing the inventory turnover

[B] increasing the accounts payable turnover
[C] increasing the accounts receivable period
[D] reducing the cash cycle
[E] reducing the accounts payable period
[A] :This will increase the cash cycle and lower the cash balance. Review section 19.2.
[B] :This will increase the cash cycle and lower the cash balance. Review section 19.2.
[C] :This will increase the cash cycle and lower the cash balance. Review section 19.2.
[E] :This will increase the cash cycle and lower the cash balance. Review section 19.2.
58) Assume your firm has a line of credit with a local bank. If the credit conditions require a _____, your firm must pay
the line down to zero once each year and maintain a zero balance for 60 days.
[A] payoff period

[B] clean-up period
[C] zero-balance period
[D] no-loan period
[E] interest-free period
[A] :This term does not describe the requirement of paying a line of credit down to zero for a specified period of time.
[C] :This term does not describe the requirement of paying a line of credit down to zero for a specified period of time.
[D] :This term does not describe the requirement of paying a line of credit down to zero for a specified period of time.
[E] :This term does not describe the requirement of paying a line of credit down to zero for a specified period of time.
59) All else equal, shortening your firm's cash cycle will:
[A] reduce your fixed asset requirements.

[B] increase your short-term financing needs.
[C] increase your long-term debt requirements.
[D] increase return on assets.
[E] increase your accounts receivable period.
[A] :Shortening the cash cycle will not affect fixed asset requirements. Review section 19.2.
[B] :If you shorten the number of days you need to finance in the operating cycle, won't your short-term borrowing
costs decline? Review section 19.2.
[C] :Since you are decreasing your need for cash, why would you need more long-term debt? Review section 19.2.
[E] :This will not lengthen your accounts receivable period. Review section 19.2.
1 with $10,000 in cash. All sales and purchases are on credit. There are no other costs or revenues. What are
Jumbo's total cash disbursements in March? Assume there are 30 days in every month.
[A] $4,200
[B] $5,600
[C] $7,100
[D] $8,300
[E] $9,800
[A] :How much did you buy in February? Review section 19.4.
[C] :How much did you buy in February? Review section 19.4.
[D] :How much did you buy in February? Review section 19.4.
[E] :How much did you buy in February? Review section 19.4.
61) Which of the following activities increase cash, all else equal?
I. reducing long-term debt
II. acquiring inventory
III. selling fixed assets
IV. factoring accounts receivable
[A] I only
[B] II only
[C] I and IV only
[D] I, II, and III only
[E] III and IV only

[B] :An increase in an asset is a use of cash. Review section 19.1.
[C] :At least one of these is a use of cash. Review section 19.1.
[D] :At least one of these is a use of cash. Review section 19.1.
62) Which of the following activities will decrease net working capital, all else equal? Assume the current ratio is
greater than one.
I. selling of inventory at book value for cash
II. increasing accounts payable
III. selling marketable securities and using the proceeds to pay dividends
[A] I only
[B] II only
[C] I and II only
[D] II and III only
[E] III only
[A] :In this case, inventory declines and cash rises by an equal amount. Thus, there is no change in net working
capital. Review section 19.1.
[C] :At least one of these activities does not change net working capital. Review section 19.1.
[E] :Correct, but at least one other response is correct as well. Review section 19.1.
63) A firm which consistently employs a _____ short-term financial policy will probably _____ its risk of default and/or
inventory stockouts.
[A] flexible; increase

[B] restrictive; increase
[C] neutral; increase
[D] flexible; not change
[E] restrictive; decrease
[A] :A flexible policy decreases the risk of default and/or inventory stockouts. Review section 19.3.
[C] :A neutral policy does not increase the risk of default and/or inventory stockouts. Review section 19.3.
[D] :A flexible policy decreases the risk of default and/or inventory stockouts. Review section 19.3.
[E] :A restrictive policy does not decrease the risk of default and/or inventory stockouts. Review section 19.3.
cash balance at the end of March? Assume there are 30 days in every month.
[A] $12,000
[B] $14,600
[C] $16,600
[D] $19,100
[E] $21,000
[A] :You need to review this calculation in section 19.4.

[B] :You need to review this calculation in section 19.4.
[C] :You need to review this calculation in section 19.4.
[D] :You need to review this calculation in section 19.4.
65) The short-term financial policy a firm adopts will be reflected in at least the size of the firm's investment in current
assets and the financing of its current assets.
[A] True
[B] False

[B] :These are the basic items that will reflect what a firm's short-term financial policy is. Review section 19.3.
transaction occurs at the end of the business day, how many days are in the cash cycle?
[A] 46 days
[B] 57 days
[C] 61 days
[D] 72 days
[E] 118 days
67) Which one of the following would result in a net increase in cash?
[A] purchasing inventory using funds from a new equity issue

[B] obtaining a long-term bank loan
[C] writing off existing accounts receivable that are considered uncollectible
[D] paying on an inventory loan at the bank in order to free up a trust receipt
[E] decreasing accrued liabilities
[A] :In this case, the increase in assets is a use of cash and the increase in equity is a source. Provided they are of
the same amount, the net change in cash is zero. There is a better answer. Review section 19.1.
[C] :Since charging off the receivables results in no cash flows either out or in, the net change in cash is zero.
[D] :A decrease in liabilities is a use of cash. Review section 19.1.
[E] :Since accruals are not cash expenses, this does not affect the cash flow. Review section 19.1.
68) A firm that sets liberal credit terms for its customers is likely following a flexible short-term financial policy.
[A] True
[B] False

[B] :Liberal credit terms are indicative of a liberal short-term financial policy. Review section 19.3.
69) All else equal, which of the following will likely increase the length of a firm's cash cycle?
I. changing credit terms to require payment in 30 days rather than 20
II. purchasing inventory in smaller amounts and more frequently, reducing the time required to sell it by 5 days, on
average
III. delaying payment on your firm's payables for an additional 10 days
IV. offering a larger discount for cash purchasers of your product
[A] I only
[B] III only
[C] II and III only
[D] I and IV only

[B] :This activity will actually decrease the length of the cash cycle. Review section 19.2.
[C] :These activities will actually decrease the length of the cash cycle. Review section 19.2.
[D] :At least one of these activities will actually decrease the length of the cash cycle. Review section 19.2.
[E] :At least one of these activities will actually decrease the length of the cash cycle. Review section 19.2.
70) Which of the following statements regarding short-term financial management and the organizational chart are
correct?
I. A duty of the cash manager is managing short-term borrowings.
II. A duty of the credit manager is making credit policy decisions.
III. A duty of the payables manager is determining whether or not to take discounts on purchases.
IV. A duty of the controller is making short-term investments.
[A] I and II only

[B] II and III only
[C] I, II, and IV only
[A] :Correct, but there is at least one more correct option. Review section 19.2.
[B] :Correct, but there is at least one more correct option. Review section 19.2.
[C] :You need to review the duties of a controller. Review section 19.2.
[D] :You need to review the duties of a controller. Review section 19.2.
total cash collections for February? Assume there are 30 days in every month.
[A] $8,000
[B] $10,000
[C] $12,000
[D] $13,500
[E] $14,000
[A] :February and January receivables are still unpaid. December sales are collected in February. Review section
19.4.
[B] :February and January receivables are still unpaid. December sales are collected in February. Review section
19.4.
[C] :February and January receivables are still unpaid. December sales are collected in February. Review section
19.4.
[D] :February and January receivables are still unpaid. December sales are collected in February. Review section
19.4.
72) Short-term financing for a firm can either be secured or unsecured.
[A] True
[B] False

[B] :These are the only two choices. Review section 19.5.
73) Which of the following correctly defines the operating cycle?

I. Cash cycle - Accounts payable period
II. Inventory period + Accounts receivable period
III. Cash cycle + Accounts payable period
IV. Inventory period - Accounts receivable period - Accounts payable period
[A] I and II only

[B] II and III only
[C] III and IV only
[D] I, III, and IV only
[E] II, III, and IV only
[A] :At least one of these definitions of the operating cycle is incorrect. Review section 19.2.
[C] :At least one of these definitions of the operating cycle is incorrect. Review section 19.2.
[D] :At least one of these definitions of the operating cycle is incorrect. Review section 19.2.
[E] :At least one of these definitions of the operating cycle is incorrect. Review section 19.2.
transaction occurs at the end of the business day, how many days are in the accounts receivable period?
[A] 46 days
[B] 57 days
[C] 61 days
[D] 72 days
[E] 118 days
75) Accounts receivable financing involves either assigning accounts receivable or factoring the receivables.
[A] True
[B] False

[B] :Under assignment, the lender takes the receivables as collateral but the borrower retains and collects them.
Under factoring, the lender actually takes control of the receivables and collects them. These are the two methods of
financing receivables. Review section 19.5.
76) Your boss decides that your firm will switch from a restrictive short-term financial policy to a more flexible policy.
You should expect to see the firm's net working capital:
[A] rise, due to the higher investment in current assets and the reduced use of short-term financing.
[B] fall, due to the lower investment in current assets and the increased reliance on short-term financing.
[C] rise, due to the lower investment in current assets and the greater use of short-term financing.
[D] fall, due to the higher investment in current assets and the reduced use of short-term financing.
[E] either rise or fall, but the use of short-term debt will increase.

[B] :The net working capital will not fall. Review section 19.3.
[C] :A lower investment in current assets and greater use of short-term financing will decrease net working capital.
[D] :The net working capital will not fall. Review section 19.3.
[E] :The net working capital will not fall and the use of short-term debt will not increase. Review section 19.3.
77) Which one of the following is true?
[A] A line of credit is an agreement under which a firm is authorized to borrow up to a specified amount.
[B] A noncommitted line of credit is a formal lending agreement between a borrower and a lender.
[C] As a business owner and regular short-term borrower, it would generally be less comforting to have a committed
line of credit than an uncommitted one.
[D] A compensating balance requirement tied to a loan arrangement lowers the effective interest rate the borrower
must pay on the loan.
[E] In a factoring arrangement, the default risk on the accounts remains with the selling firm.

[B] :A noncommitted line of credit is an informal borrowing arrangement. Review section 19.5.
[C] :With a committed line of credit it is less likely the bank can back out of lending the money. Review section 19.5.
[D] :A compensating balance requirement raises the effective interest rate the borrower must pay. Review section
19.5.
[E] :In factoring, collection is transferred to the lender, so they bear the default risk as well. Review section 19.5.
78) Which of the following activities increase cash, all else equal?
I. decreasing long-term debt
II. decreasing accounts receivable
III. decreasing fixed assets
IV. decreasing current liabilities
[A] I only
[B] II only
[C] I and IV only
[D] II and III only
[E] III and IV only

[C] :A decrease in a liability is a use of cash. Review section 19.1.
[E] :At least one of these responses is incorrect. Review section 19.1.
79) Which one of the following is a correct statement?
[A] The objective of short-term financial management is to maximize carrying costs.

[B] Managing short-term cash flows involves minimizing liquidity.
[C] In managing short-term finances, a financial manager should only seek the optimal level of investment in fixed
assets.
[D] A financial manager should use a cash budget to identify short-term financial needs.
[E] In an ideal economy the optimal level of net working capital is positive.
[A] :The objective is to find the optimal tradeoff between carrying costs and shortage costs. Review section 19.3.
[B] :Managing short-term cash flows involves the minimizing of costs, not liquidity. Review section 19.3.
[C] :A financial manager should seek the optimal level of investment in each of the current assets. Review section
19.3.
[E] :In an ideal economy the optimal level of net working capital is zero. Review section 19.3.
80) A firm's balance sheet contains only the following accounts: cash, other current assets, fixed assets, current
liabilities, long-term debt, and equity. Which of the following correctly defines cash using the balance sheet equation?
[A] Other current assets - Current liabilities + Fixed assets - Equity

[B] Long-term debt - Equity + Current liabilities - Other current assets + Fixed assets
[C] Other current assets - Fixed assets + Long-term debt
[D] Long-term debt + Equity + Current liabilities - Other current assets - Fixed assets
[E] Current liabilities - Current assets + Other current assets
[A] :Total assets equal total liabilities plus total equity. What is the relationship between total assets and cash?
[B] :Total assets equal total liabilities plus total equity. What is the relationship between total assets and cash?
[C] :Total assets equal total liabilities plus total equity. What is the relationship between total assets and cash?
[E] :Total assets equal total liabilities plus total equity. What is the relationship between total assets and cash?
81) Which of the following questions relate to short-term financial planning?

I. How much cash should be kept on hand?
II. What is the optimal level of long-term unsecured credit?
III. How long should credit be extended to customers?
IV. Should the firm issue commercial paper?
[A] I and III only

[B] II and IV only
[C] II and III only
[D] I, II, and IV only
[E] I, III, and IV only
[A] :Correct, but isn’t commercial paper also a short-term financing consideration? Review the introduction to chapter
19.
[B] :One of these is a long-term not a short-term financing question. Review the introduction to chapter 19.
[C] :One of these is a long-term not a short-term financing question. Review the introduction to chapter 19.
[D] :One of these is a long-term not a short-term financing question. Review the introduction to chapter 19.
82) The _____ is the period of time between the sale of inventory and the collection of the receivable.
[A] cash cycle

[D] accounts receivable period
[E] operating cycle
[A] :This period measures the time it takes for cash to flow in once it has flowed out of the firm. Review section 19.2.
[B] :This period is unrelated to the time it takes to collect on a receivable. Review section 19.2.
[C] :This period is unrelated to the time it takes to collect on a receivable. Review section 19.2.
[E] :The period of time between the sale of inventory and the collection of the receivable is just a part of the
operating cycle. Review section 19.2.
83) Your company has a $100,000 line of credit through a local bank. The bank requires an 8 percent compensating
balance and charges 10 percent on the amount borrowed against the line. If the company needs $55,000 to
purchase inventory, what is the minimum amount you must put into the compensating balance account? Assume the
loan is for a period of one year.
[A] $4,129
[B] $4,328
[C] $4,400
[D] $4,783
[E] $5,500
[A] :The firm gets to use only 92 percent of each dollar it borrows. Since it needs $55,000, it must borrow $59,783.
What is the compensating balance requirement on this amount? Review section 19.5.
[B] :The firm gets to use only 92 percent of each dollar it borrows. Since it needs $55,000, it must borrow $59,783.
[C] :The firm gets to use only 92 percent of each dollar it borrows. Since it needs $55,000, it must borrow $59,783.
[E] :The firm gets to use only 92 percent of each dollar it borrows. Since it needs $55,000, it must borrow $59,783.
84) Lazy Credit Mfg. needs some quick cash. If the firm's CFO arranges to sell $1,000,000 in receivables to another
party for 92 percent of face, and the other party takes full responsibility for collecting the receivables, the CFO has
arranged a(n):
[A] assignment of receivables.
[B] line-of-credit security arrangement.
[C] assigned factoring arrangement.
[D] maturity factoring arrangement.
[E] conventional factoring arrangement.
[A] :In an assignment of receivables, LazyCredit would most likely have to collect the receivables itself. Review
section 19.5.
[B] :If the receivables are used as collateral for a line of credit, LazyCredit will be responsible for collecting the
receivables itself. Review section 19.5.
[C] :There is no such arrangement. Review section 19.5.
[D] :This is a factoring arrangement, but with maturity factoring the money will be received by LazyCredit at some
agreed-upon future date, not immediately. Review section 19.5.
cash balance at the end of January? Assume there are 30 days in every month.
[A] $10,000
[B] $11,000
[C] $12,000
[D] $13,500
[E] $14,000
[A] :Did you get January collections of $8,000 and payments of $7,000? Review section 19.4.
[C] :Did you get January collections of $8,000 and payments of $7,000? Review section 19.4.
[D] :Did you get January collections of $8,000 and payments of $7,000? Review section 19.4.
[E] :Did you get January collections of $8,000 and payments of $7,000? Review section 19.4.
86) Suppose that the inventory period is 50 days, the accounts receivable period is 40 days, and the cash cycle is 59
days. What is the operating cycle?
[A] 35 days
[B] 55 days
[C] 90 days
[D] 99 days
[E] 109 days
[A] :The operating cycle is the sum of the accounts receivable period and the inventory period. Review section 19.2.
[B] :The operating cycle is the sum of the accounts receivable period and the inventory period. Review section 19.2.
[D] :The operating cycle is the sum of the accounts receivable period and the inventory period. Review section 19.2.
[E] :The operating cycle is the sum of the accounts receivable period and the inventory period. Review section 19.2.
87) A firm experiencing short-term cash flow problems can most easily deal with the problem by:
[A] drawing on their good credit rating to apply for a secured loan.
[B] applying for a noncommitted line of credit.
[C] issuing new long-term bonds.
[D] drawing on their good credit rating to apply for a short-term unsecured loan.
[E] drawing on an existing, unused committed line of credit.
[A] :This would solve the problem, but it is not the easiest of the solutions listed here. There is a better choice.
[B] :This would solve the problem, but it is not the easiest of the solutions listed here. There is a better choice.
[C] :This would solve the problem, but it is not the easiest of the solutions listed here. There is a better choice.
[D] :This would solve the problem, but it is not the easiest of the solutions listed here. There is a better choice.
88) Your banker is getting nervous about your firm's liquidity since your net working capital is currently down to $500
from its normal level around $15,000. Which one of the following actions would increase the net working capital and
helps ease the bank’s concerns?
[A] selling 30-year bonds and using the proceeds to purchase fixed assets
[B] allowing preferred shareholders to convert their holdings into common stock with no exchange of cash
[C] selling a large part of your inventory at cost by loosening your credit policies
[D] selling some of the firm’s fixed assets and purchasing marketable securities
[E] filing for bankruptcy
[A] :Since this transaction only affects long-term debt and fixed assets it does not affect net working capital. Review
section 19.1.
[B] :Since this transaction affects only the capital accounts it does not have an impact on net working capital. Review
section 19.1.
[C] :Since total current assets do not change, neither does net working capital. Review section 19.1.
[E] :How would this satisfy the bank's concerns? Review section 19.1.
89) A firm which employs a flexible short-term financial policy will have a relatively:
[A] low ratio of current assets to sales.

[B] low amount of marketable securities.
[C] low amount of short-term debt relative to long-term debt.
[D] high amount of short-term debt.
[E] high amount of accounts payable relative to long-term debt.
[A] :A firm with a flexible policy will have a relatively high amount of current assets to sales. Review section 19.3.
[B] :With a flexible policy, a firm is more likely to have excess cash that must be invested in marketable securities.
[D] :With a flexible policy, a firm is more likely to finance its current assets using more long-term debt and less short-
term debt. Review section 19.3.
[E] :With a flexible policy, a firm tends to have more long-term debt relative to short term debt. Review section 19.3.
90) An increase in an asset account is an activity that decreases cash.
[A] True
[B] False

[B] :An increase in an asset account means cash has been expended. Review section 19.1.
91) According to the text, the _____ is generally responsible for the monitoring and control of accounts receivable.
[A] credit manager

[B] controller
[C] purchasing manager
[D] cash manager

[B] :This manager performs more of an information and reconciliation function than an actual decision making
[C] :This manager does not deal with accounts receivable. Review section 19.2.
[D] :This manager does not deal with accounts receivable. Review section 19.2.
[E] :This manager does not deal with accounts receivable. Review section 19.2.
92) Suppose that the inventory period is 50 days, the accounts receivable period is 40 days, and the cash cycle is 55
days. What is the accounts payable period?
[A] 35 days
[B] 45 days
[C] 55 days
[D] 90 days
[E] 135 days
[B] :The accounts payable period is the operating cycle minus the cash cycle. How many days are there in the
[C] :The accounts payable period is the operating cycle minus the cash cycle. How many days are there in the
[D] :The accounts payable period is the operating cycle minus the cash cycle. How many days are there in the
[E] :The accounts payable period is the operating cycle minus the cash cycle. How many days are there in the
93) Which one of the following would decrease the length of the cash cycle, all else equal?
[A] increasing the inventory period

[B] decreasing the inventory turnover rate
[C] increasing the accounts receivable turnover rate
[D] increasing the accounts payable turnover rate
[E] extending the credit terms for customers from 30 to 45 days
[A] :An increase in the inventory period would increase the cash cycle. Review section 19.2.
[B] :A decrease in the inventory turnover rate increases the inventory period which increases the cash cycle. Review
section 19.2.
[D] :This decreases the accounts payable period and increases the cash cycle. Review section 19.2.
[E] :This increases the accounts receivable period which increases the cash cycle. Review section 19.2.
94) A _____ is an informal arrangement between a bank and a business that allows the firm to periodically borrow up
to a pre-specified limit with limited paperwork.
[A] noncommitted line of credit

[B] committed line of credit
[C] compensating balance
[D] long-term loan commitment
[E] field warehouse financing arrangement

[B] :A committed line of credit is a formal legal arrangement. Review section 19.5.
[C] :A compensating balance relates to money kept by the firm with the bank and is not a type of loan. Review
section 19.5.
[D] :A long-term loan commitment does not relate to periodic short-term borrowing. Review section 19.5.
[E] :Field warehouse financing is a very formal legal arrangement that relates to inventory financing. Review section
19.5.
95) _____ fall with increases in the level of investment in current assets, while _____ increase.
[A] Carrying costs; shortage costs

[B] Shortage costs; carrying costs
[C] Carrying costs; stock out
[D] Shortage costs; order costs
[E] Stock out costs; order costs
[A] :Carrying costs do not fall and shortage costs do not rise. Review section 19.3.
[C] :Carrying costs do not fall and stockout costs do not rise. Review section 19.3.
[D] :Shortage costs fall but order costs fall as well. Review section 19.3.
[E] :Stockout costs fall but order costs fall as well. Review section 19.3.
96) As the CFO of Fly-By-Nite Airlines, you decide to allow customers 40 days to pay their bills. Currently, your firm
requires payment in 30 days. All else equal, this action will increase both the firm’s:
[A] operating and cash cycles.

[B] cash cycle and it’s inventory period.
[C] accounts payable period and it’s operating cycle.
[D] inventory period and it’s operating cycle.
[E] accounts receivable and inventory periods.
[B] :This decision will not alter the firm's inventory period. Review section 19.2.
[C] :This decision will not alter the firm's accounts payable period. Review section 19.2.
[D] :This decision will not alter the firm's inventory period. Review section 19.2.
[E] :This decision will not alter the firm's inventory period. Review section 19.2.
transaction occurs at the end of the business day, how many days are in the inventory period?
[A] 46 days
[B] 57 days
[C] 61 days
[D] 72 days
[E] 118 days
98) Which one of the following actions would decrease net working capital?
[A] using cash to pay accounts payable

[B] using cash to repurchase common stock
[C] buying inventory on credit
[D] selling inventory at a profit and using the entire proceeds to purchase marketable securities
[E] collecting accounts receivable and using the proceeds to increase your savings account balance
[A] :How can net working capital change if you decrease current assets and current liabilities by the same amount?
[C] :How can net working capital change in you increase current assets and current liabilities by the same amount?
[D] :This will increase both total current assets and net working capital. Review section 19.1.
[E] :This will not change net working capital. Review section 19.1.
99) A firm has average inventory of $1,250,000, an inventory period of 58 days, a receivables period of 32 days, and
average payables of $810,000. What is its cash cycle?
[A] 48 days
[B] 52 days
[C] 58 days
[D] 67 days
[E] 74 days
[A] :To begin, you must first find the firm's COGS using the inventory and inventory turnover. Did you get
$7,866,379? Then, you must use this to find the accounts payable period. Did you get 37.6 days? Finally, use this
and the operating cycle given to find the cash cycle. Review section 19.2.
[C] :To begin, you must first find the firm's COGS using the inventory and inventory turnover. Did you get
[D] :To begin, you must first find the firm's COGS using the inventory and inventory turnover. Did you get
[E] :To begin, you must first find the firm's COGS using the inventory and inventory turnover. Did you get
100) Increases in liability accounts are activities that decrease cash.
[A] True
[B] False
[A] :An increase in a liability account increases cash. Review section 19.1.

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Questions in [New Questions]

[A] 9.20 percent

[A] :You are correct!

4) Which of the following questions are considered a part of short-term finance?

[A] I and IV only

[A] :You are correct!

[A] accounts payable period

[A] :This is an incorrect choice. Try again. Review section 19.2.

9) Which one of the following is a source of cash, all else equal?

[A] retiring commercial paper

[A] :A decrease in a liability is a use of cash. Review section 19.1.

[A] 2.0 percent

[A] production manager

12) The payment by a firm for goods or services provided by a supplier is a:

[A] capital expenditure.

[A] :You are correct!

[A] :You are correct!

[A] :You are correct!

[A] :You need to review this calculation in section 19.4.

18) Managing short-term cash flows involves minimizing costs.

[A] :You are correct!

[A] collateral requirement

21) A compensating balance requirement reduces the cost of a loan to a borrower.

[A] :You are correct!

[A] increasing accounts payable

[A] :An increase in a liability is a source of cash. Review section 19.1.

[A] production manager

[A] high ratio of current assets to sales.

[A] :You are correct!

[A] acquired and when it is actually paid for.

[A] Cash - Current liabilities

[A] :You are correct!

[A] accounts receivable period

[A] I and III only

[A] inventory period.

[A] credit manager

[A] It will fall from 89 days to 83 days.

43) Most firms have a positive cash cycle.

[A] :You are correct!

[A] accounts receivable period

[A] blanket inventory lien financing.

[A] current costs

47) Which one of the following is true?

[A] obtaining an unsecured short-term loan.

[A] :You are correct!

[A] Should a manufacturing plant be expanded to increase production capacity?

[A] credit manager

[A] :You are correct!

[A] accounts receivable period

[A] reducing the inventory turnover

[A] payoff period

[A] reduce your fixed asset requirements.

[A] :A decrease in a liability is a use of cash. Review section 19.1.

[A] flexible; increase

[A] :You need to review this calculation in section 19.4.

[A] :You are correct!

[A] purchasing inventory using funds from a new equity issue

[A] :You are correct!

[A] :You are correct!

[A] I and II only

72) Short-term financing for a firm can either be secured or unsecured.

[A] :You are correct!

73) Which of the following correctly defines the operating cycle?

[A] I and II only