Test bank fundamentals of corporate finance 9th edition chap018

Chapter 18 - Short-Term Finance and Planning

Chapter 18
Short-Term Finance and Planning
Multiple Choice Questions

1. The length of time between the purchase of inventory and the receipt of cash from the sale
of that inventory is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.

2. The length of time that elapses between the day a firm purchases an inventory item and the
day that item sells is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.

3. The length of time between the sale of inventory and the collection of the payment for that
sale is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.

4. The length of time between the day a firm purchases an item from its supplier until the day

that supplier is paid for that purchase is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.

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Chapter 18 - Short-Term Finance and Planning

5. Central Supply purchased a toboggan for inventory this morning and paid cash for it. The
time period between today and the day Central Supply will receive cash from the sale of this
toboggan is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.

6. A graphical representation of the operating and cash cycles is called a(n):
A. operating chart.
B. cash flow time line.
C. production flow line.
D. component chart.
E. working time line.

7. Costs that increase as a firm acquires additional current assets are called _____ costs.
A. carrying

B. shortage
C. order
D. safety
E. trading

8. Costs that decrease as a firm acquires additional current assets are called _____ costs.
A. carrying
B. shortage
C. debt
D. equity
E. payables

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Chapter 18 - Short-Term Finance and Planning

9. Steve has estimated the cash inflows and outflows for his hardware store for next year. The
report that he has prepared recapping these cash flows is called a:
A. pro forma income statement.
B. sales projection.
C. cash budget.
D. receivables analysis.
E. credit analysis.

10. Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at
any time over the next year. This arrangement is called a(n):
A. floor loan.
B. open loan.
C. compensating balance.

D. line of credit.
E. bank note.

11. Money deposited by a borrower with the bank in a low or non-interest-bearing account as
a condition of a loan agreement is called a:
A. compensating balance.
B. secured credit deposit.
C. letter of credit.
D. line of credit.
E. pledge.

12. Brustle's Pottery either factors or assigns all of its receivables to other firms. This is
known as:
A. accounts receivable financing.
B. pledged financing.
C. capital funding.
D. daily funding.
E. capital financing.

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Chapter 18 - Short-Term Finance and Planning

13. Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as
collateral. This is an example of a(n):
A. debenture.
B. line of credit.
C. banker's acceptance.
D. working loan.

E. inventory loan.

14. Which one of the following increases cash?
A. granting credit to a customer
B. purchasing new machinery
C. making a payment on a bank loan
D. purchasing inventory
E. accepting credit from a supplier

15. Which of the following are uses of cash?
I. collecting a receivable
II. increasing inventory
III. obtaining a bank loan
IV. paying a supplier for previous purchases
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and IV only
E. II, III, and IV only

16. Which one of the following will increase net working capital? Assume the current ratio is
greater than 1.0.
A. paying a supplier for a previous purchase
B. paying off a long-term debt
C. selling inventory at cost
D. purchasing inventory on credit
E. selling inventory at a profit on credit

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Chapter 18 - Short-Term Finance and Planning

17. Which one of the following will decrease the net working capital of a firm? Assume the
current ratio is greater than 1.0.
A. selling inventory at cost
B. collecting payment from a customer
C. paying a payment on a long-term debt
D. selling a fixed asset for book value
E. paying a supplier for the purchase of an inventory item

18. Which of the following are sources of cash?
I. decrease in inventory
II. increase in accounts receivable
III. repayment of a bond
IV. sale of preferred stock
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, III, and IV only

19. Which of the following will increase the operating cycle?
I. increasing the inventory turnover rate
II. increasing the payables period
III. decreasing the receivable turnover rate
IV. decreasing the inventory level
A. I only
B. III only
C. II and IV only

D. I and IV only
E. II and III only

20. Which one of the following equals the operating cycle?
A. cash cycle plus accounts receivable period
B. inventory period plus the accounts receivable period
C. inventory period plus the accounts payable period
D. accounts payable period minus the cash cycle
E. accounts payable period plus the accounts receivable period

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Chapter 18 - Short-Term Finance and Planning

21. Which one of the following will decrease the operating cycle?
A. decreasing the inventory turnover rate
B. decreasing the accounts payable period
C. increasing the accounts receivable turnover rate
D. increasing the accounts payable period
E. increasing the accounts receivable period

22. The operating cycle describes how a product:
A. is priced.
B. is sold.
C. moves through the current asset accounts.
D. moves through the production process.
E. generates a profit.

23. Which of the following determines the length of the operating cycle?

I. cash cycle
II. inventory period
III. accounts payable period
IV. accounts receivable period
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV

24. Which of the following will increase the cash cycle, all else constant?
I. increasing the inventory period
II. decreasing the accounts receivable turnover rate
III. increasing the accounts payable period
IV. decreasing the accounts receivable period
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, and III only
E. I, III, and IV only

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Chapter 18 - Short-Term Finance and Planning

25. An increase in which one of the following will decrease the cash cycle, all else equal?
A. payables turnover
B. days sales in inventory
C. operating cycle

D. inventory turnover rate
E. accounts receivable period

26. Metal Designs, Inc., historically produced products for inventory. Now, the firm only
produces a product when it receives an actual order from a customer. All else equal, this
change will:
A. increase the operating cycle.
B. lengthen the accounts receivable period.
C. shorten the accounts payable period.
D. decrease the cash cycle.
E. decrease the inventory turnover rate.

27. Which of the following statements are correct?
I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.
A. I only
B. III and IV only
C. I and III only
D. I and IV only
E. I, II, and III only

28. Which one of the following statements is correct concerning the cash cycle?
A. The longer the cash cycle, the more likely a firm will need external financing.
B. Increasing the accounts payable period increases the cash cycle.
C. A positive cash cycle is preferable to a negative cash cycle.
D. The cash cycle can exceed the operating cycle if the payables period is equal to zero.
E. Offering early payment discounts to customers will tend to increase the cash cycle.

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Chapter 18 - Short-Term Finance and Planning

29. Which of the following actions will tend to decrease the inventory period?
I. discontinuing all slow-selling merchandise
II. selling obsolete inventory below cost just to get rid of it
III. buying raw materials only as needed for the manufacturing process
IV. producing goods on demand versus for inventory
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

30. Which one of the following actions will tend to increase the accounts receivable period?
Assume the accounts receivable period is currently 34 days.
A. tightening the standards for granting credit to customers
B. refusing to grant additional credit to any customer who pays late
C. increasing the finance charges applied to all customer balances outstanding over thirty days
D. granting discounts for cash sales
E. eliminating the discount for early payment by credit customers

31. An increase in which one of the following is an indicator that an accounts receivable
policy is becoming more restrictive?
A. bad debts
B. accounts receivable turnover rate
C. accounts receivable period
D. credit sales

E. operating cycle

32. If you pay your suppliers five days sooner, then:
A. your payables turnover rate will decrease.
B. you may require additional funds from other sources to fund the cash cycle.
C. the cash cycle will decrease.
D. your operating cycle will increase.
E. the accounts receivable period will decrease.

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Chapter 18 - Short-Term Finance and Planning

33. Which one of the following will increase the accounts payable period, all else constant?
A. an increase in the cost of goods sold account value
B. an increase in the ending accounts payable balance
C. an increase in the cash cycle
D. a decrease in the operating cycle
E. an increase in the accounts payable turnover rate

34. Which one of the following managers determines which customers must pay cash and
which can charge their purchases?
A. purchasing manager
B. credit manager
C. controller
D. production manager
E. payables manager

35. Which one of the following managers determines when a supplier will be paid?

A. controller
B. payables manager
C. credit manager
D. purchasing manager
E. production manager

36. A firm with a flexible short-term financial policy will:
A. maintain a low balance in accounts receivables.
B. only have minimal amounts, if any, invested in marketable securities.
C. invest heavily in inventory.
D. have low cash balances.
E. have tight restrictions on granting credit to customers.

37. Which one of the following is indicative of a short-term restrictive financial policy?
A. purchasing inventory on an as-needed basis
B. granting credit to all customers
C. investing heavily in marketable securities
D. maintaining a large accounts receivable balance
E. keeping inventory levels high

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Chapter 18 - Short-Term Finance and Planning

38. Which of the following are associated with a restrictive short-term financial policy?
I. little, if any, investment in marketable securities
II. liberal credit terms for customers
III. low cash balances
IV. increasing inventory levels

A. I and III only
B. II and IV only
C. I and IV only
D. III and IV only
E. I, II, and III only

39. The Lumber Mart recently replaced its management team. As a result, the firm is
implementing a restrictive short-term policy in place of the flexible policy under which the
firm had been operating. Which of the following should the employees expect as a result of
this policy change?
I. reduction in sales due to stock outs
II. greater inventory selection
III. decreased sales due to the new accounts receivable credit policy
IV. decreased investment in marketable securities
A. I and II only
B. II and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV

40. A flexible short-term financial policy:
A. increases a firm's need for long-term financing.
B. minimizes net working capital.
C. avoids bad debts by only selling items for cash.
D. maximizes fixed assets and minimizes current assets.
E. is most appropriate for a firm with relatively high carrying costs and relatively low
shortage costs.

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Chapter 18 - Short-Term Finance and Planning

41. A flexible short-term financial policy:
I. increases shortage costs due to frequent cash-outs.
II. tends to increase sales as compared to a restrictive policy.
III. requires a sizeable investment in current assets.
IV. incurs more carrying costs than a restrictive policy.
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only

42. Shortage costs include which of the following?
I. disruption of production schedules
II. inventory ordering costs
III. lost customer goodwill
IV. brokerage costs
A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

43. The optimal investment in current assets for an operating firm occurs at the point where:
A. both shortage costs and carrying costs equal zero.
B. shortage costs are equal to zero.
C. carrying costs are equal to zero.
D. carrying costs exceed shortage costs.

E. the total costs of holding current assets is minimized.

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Chapter 18 - Short-Term Finance and Planning

44. Which one of the following statements is correct?
A. A firm with a restrictive financing policy secures sufficient long-term financing to fund all
its assets.
B. A firm with a flexible financing policy frequently invests in marketable securities.
C. A firm with a flexible financing policy tends to use short-term financing on a frequent
basis.
D. Firms tend to avoid short-term financing under both restrictive and flexible financing
policies.
E. Firms with seasonal sales select flexible financing policies.

45. Which one of the following statements is correct?
A. Seasonal needs are financed externally when firms adhere to a flexible financing policy.
B. A flexible financing policy tends to increase the risk of encountering financial distress.
C. Long-term interest rates tend to be less volatile than short-term rates.
D. Most firms tend to finance inventory with long-term debt.
E. Short-term interest rates are generally higher than long-term rates.

46. Assume each month has 30 days and a firm has a 60-day accounts receivable period.
During the second calendar quarter of the year, that firm will collect payment for the sales it
made during which of the following months?
A. October, November, and December
B. November, December, and January
C. December, January, and February

D. January, February, and March
E. February, March, and April

47. The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in the
month following the month of sale, and 15 percent of sales in the second month following the
month of sale. During the month of April, the firm will collect:
A. 60 percent of February sales.
B. 15 percent of April sales.
C. 60 percent of March sales.
D. 15 percent of March sales.
E. 25 percent of February sales.

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Chapter 18 - Short-Term Finance and Planning

48. A manufacturing firm has a 90 day collection period. The firm produces seasonal
merchandise and thus has the least sales during the first quarter of a year and the highest level
of sales during the fourth quarter of a year. The firm maintains a relatively steady level of
production which means that its cash disbursements are fairly equal in all quarters. The firm is
most apt to face a cash-out situation in:
A. the first quarter.
B. the second quarter.
C. the third quarter.
D. the fourth quarter.
E. any quarter with equal probabilities of occurrence.

49. Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in
products related to water sports. The firm purchases inventory one month before it is sold and

pays for its purchases 60 days after the invoice date. Sales are highest during July and August.
Currently, Jill is preparing the cash disbursements section of the firm's cash budget. Which
one of the following statements is supported by this information?
A. Inventory purchases will be highest during the months of July and August.
B. Inventory purchases will be highest during the months of May and June.
C. Payments to suppliers will be highest during the months of June and July.
D. Payments to suppliers will be highest during the months of July and August.
E. Payments to suppliers will be highest during the months of August and September.

50. Which two of the following are most apt to cause a cash-out for a firm that is generally
financially sound?
I. fixed expenses
II. fixed asset purchases
III. flexible financing policy
IV. highly seasonal sales
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. II, III, and IV only

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Chapter 18 - Short-Term Finance and Planning

51. Which one of the following statements is correct concerning the cash balance of a firm?
A. Most firms attempt to maintain a zero cash balance at all times.
B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance
plus the minimum desired cash balance.

C. On a cash balance report, the cumulative cash surplus at the end of May is used as June's
beginning cash balance.
D. A cumulative cash deficit indicates a borrowing need.
E. The ending cash balance must equal the minimum desired cash balance.

52. A cumulative cash deficit indicates a firm:
A. has at least a short-term need for external funding.
B. is facing long-term financial distress.
C. will go out of business within the year.
D. is capable of funding all of its needs internally.
E. is using its cash wisely.

53. The most common means of financing a temporary cash deficit is a:
A. long-term secured bank loan.
B. short-term secured bank loan.
C. short-term issue of corporate bonds.
D. long-term unsecured bank loan.
E. short-term unsecured bank loan.

54. The primary difference between a line of credit and a revolving credit arrangement is the:
A. type of collateral used to secure the loan.
B. length of the credit period.
C. fact that the line of credit is a secured loan and the revolving credit arrangement is
unsecured.
D. fact that the line of credit is an unsecured loan and the revolving credit arrangement is
secured.
E. classification as either a committed or a noncommitted loan.

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Chapter 18 - Short-Term Finance and Planning

55. A compensating balance:
I. is required when a firm acquires any bank financing other than a line of credit.
II. increases the cost of short-term bank financing.
III. may be required even if a firm never borrows funds.
IV. is often used as a means of paying for banking services received.
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. II, III, and IV only

56. High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major
purchase, the company assigns these receivables to Cross Town Bank. Which one of the
following statements correctly describes this transaction?
A. HPH will immediately receive $165,000 and will have no further obligation related to
these receivables.
B. HPH will receive some amount of cash immediately while maintaining full responsibility
for any uncollected receivables.
C. Cross Town Bank accepts full responsibility for the collection of the accounts receivables
and, in exchange, immediately pays HPH a discounted value for its receivables.
D. Cross Town Bank accepts full responsibility for collecting the accounts receivables and
pays HPH a discounted price for the accounts collected after the normal collection period has
elapsed.
E. HPH receives the full amount of its receivables upon assignment but must reimburse Cross
Town Bank for any uncollected account.

57. Which one of the following statements is correct?

A. The assignment of receivables involves selling the firm's accounts receivables at full price.
B. Lines of credit frequently require a cleanup period.
C. With maturity factoring, the borrower receives the loan amount immediately.
D. Commercial paper is short-term financing offered to highly-rated corporations by major
banks.
E. Credit card receivables funding is a relatively inexpensive method of borrowing on a shortterm basis.

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Chapter 18 - Short-Term Finance and Planning

58. Which of the following are benefits derived from short-term financial planning?
I. having advance notice of when your firm will require external financing
II. being able to determine the extent of time for which a loan is required
III. having the ability to time capital expenditures in order to place the least financial burden
possible on a firm
IV. knowing for certain what your cash balance will be six months in advance
A. I and III only
B. I, II, and III only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

59. Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm
had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length
of the inventory period?
A. 19.21 days
B. 20.89 days
C. 26.72 days

D. 30.53 days
E. 33.69 days

60. A national firm has sales of $729,000 and cost of goods sold of $478,000. At the
beginning of the year, the inventory was $37,000. At the end of the year, the inventory balance
was $41,000. What is the inventory turnover rate?
A. 12.26 times
B. 12.78 times
C. 14.22 times
D. 18.56 times
E. 19.70 times

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Chapter 18 - Short-Term Finance and Planning

61. North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 72
percent of sales. The firm has an average inventory of $23,000. How many days on average
does it take the firm to sell its inventory?
A. 11.24 days
B. 12.30 days
C. 16.48 days
D. 26.35 days
E. 29.68 days

62. The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of sales.
The beginning accounts receivable balance is $41,000 and the ending accounts receivable
balance is $38,000. How long on average does it take the firm to collect its receivables?
A. 17.26 days

B. 17.78 days
C. 18.58 days
D. 20.44 days
E. 29.77 days

63. The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts
receivable of $9,800, and average accounts payable of $12,600. How long does it take for the
firm's credit customers to pay for their purchases?
A. 7.67 days
B. 8.78 days
C. 9.24 days
D. 11.88 days
E. 13.81 days

64. The Mountain Top Shoppe has sales of $512,000, average accounts receivable of $31,400
and average accounts payable of $24,800. The cost of goods sold is equivalent to 71 percent
of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?
A. 21.76 days
B. 22.38 days
C. 24.90 days
D. 25.89 days
E. 26.67 days

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Chapter 18 - Short-Term Finance and Planning

65. HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending
accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods

sold were $442,000. What is the payables turnover rate?
A. 7.86 times
B. 8.39 times
C. 9.02 times
D. 9.86 times
E. 10.85 times

66. Your firm has an inventory turnover rate of 14, a payables turnover rate of 8, and a
receivables turnover rate of 19. How long is your firm's operating cycle?
A. 45.06 days
B. 45.28 days
C. 45.63 days
D. 53.13 days
E. 53.78 days

67. Merryl Enterprises currently has an operating cycle of 62 days. The firm is analyzing
some operational changes, which are expected to increase the accounts receivable period by 2
days and decrease the inventory period by 5 days. The accounts payable turnover rate is
expected to increase from 42 to 46 times per year. If all of these changes are adopted, what
will the firm's new operating cycle be?
A. 51 days
B. 57 days
C. 59 days
D. 60 days
E. 65 days

68. On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87
days on average to pay for its purchases. On the other hand, its average customer pays with a
credit card which allows the firm to collect its receivables in 4 days. Given this information,
what is the length of operating cycle?

A. 31 days
B. 38 days
C. 45 days
D. 56 days
E. 62 days

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Chapter 18 - Short-Term Finance and Planning

69. Interior Designs has an inventory period of 46 days, an accounts payable period of 38
days, and an accounts receivable period of 32 days. Management is considering an offer from
their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is
taken, the accounts payable period is expected to decline by 26 days. If the new discount is
taken, the operating cycle will be _____ days.
A. 52
B. 62
C. 71
D. 78
E. 91

70. Metal Products Co. has an inventory period of 53 days, an accounts payable period of 68
days, and an accounts receivable turnover rate of 18. What is the length of the cash cycle?
A. 3.00 days
B. 5.28 days
C. 26.28 days
D. 71.00 days
E. 73.28 days

71. West Chester Automation has an inventory turnover of 16 and an accounts payable
turnover of 11. The accounts receivable period is 36 days. What is the length of the cash
cycle?
A. 5.67 days
B. 25.63 days
C. 41.00 days
D. 52.00 days
E. 58.81 days

72. Peterson's Antiquities currently has a 31 day cash cycle. Assume the firm changes its
operations such that it decreases its receivables period by 2 days, decreases its inventory
period by 3 days, and decreases its payables period by 4 days. What will the length of the cash
cycle be after these changes?
A. 22 days
B. 23 days
C. 29 days
D. 30 days
E. 31 days

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Chapter 18 - Short-Term Finance and Planning

73. A company currently has a 48 day cash cycle. Assume the firm changes its operations
such that it decreases its receivables period by 2 days, increases its inventory period by 3
days, and increases its payables period by 4 days. What will the length of the cash cycle be
after these changes?
A. 42 days
B. 43 days

C. 45 days
D. 47 days
E. 49 days

74. Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year are
estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first
quarter of the year. Given this information, which one of the following statements is correct?
Assume a year has 360 days.
A. The firm will collect $800 in Quarter 2.
B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.
C. The firm will collect $2,000 in Quarter 3.
D. The firm will have an accounts receivable balance of $2,300 at the end of the year.
E. The firm will collect a total of $2,400 in Quarter 4.

75. Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Sales for
February through May are $720, $760, $820, and $850, respectively. The accounts receivable
period is 30 days. What is the amount of the April collections? Assume a year has 360 days.
A. $720
B. $760
C. $790
D. $820
E. $850

76. Davis and Davis have expected sales of $490, $465, $450, and $570 for the months of
January through April, respectively. The accounts receivable period is 28 days. What is the
accounts receivable balance at the end of March? Assume a year has 360 days.
A. $420
B. $426
C. $440
D. $450

E. $482

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Chapter 18 - Short-Term Finance and Planning

77. The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales
for January through April are $440, $460, $690, and $720, respectively. The accounts
receivable period is 60 days. How much did the firm collect in the month of April? Assume a
year has 360 days.
A. $410
B. $440
C. $460
D. $690
E. $720

78. Breakwater Aquatics has a 45 day accounts receivable period. The estimated quarterly
sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400,
respectively. What is the accounts receivable balance at the beginning of the third quarter?
Assume a year has 360 days.
A. $3,400
B. $3,550
C. $6,950
D. $7,100
E. $7,650

79. The Dog House expects sales of $560, $650, $670, and $610 for the months of May
through August, respectively. The firm collects 20 percent of sales in the month of sale, 70
percent in the month following the month of sale, and 8 percent in the second month

following the month of sale. The remaining 2 percent of sales is never collected. How much
money does the firm expect to collect in the month of August?
A. $621
B. $628
C. $633
D. $639
E. $643

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Chapter 18 - Short-Term Finance and Planning

80. The Wire House purchases its inventory one quarter prior to the quarter of sale. The
purchase price is 55 percent of the sales price. The accounts payable period is 45 days. The
accounts payable balance at the beginning of quarter one is $62,000. What is the amount of
the expected disbursements for quarter two given the following expected quarterly sales?

A. $20,500
B. $21,725
C. $24,250
D. $26,000
E. $26,675

81. Nadine's Boutique has a 30 day accounts payable period. The firm has expected quarterly
sales of $1,100, $1,400, $1,700, and $2,100, respectively, for next year. The quarterly cost of
goods sold is equal to 68 percent of the next quarter's sales. The firm has a beginning accounts
payable balance of $550 as of Quarter 1. What is the amount of the projected cash
disbursements for accounts payable for Quarter 3 of the next year? Assume a year has 360
days.

A. $1,195
B. $1,208
C. $1,247
D. $1,337
E. $1,380

82. Kid's Delight expects to sell $8,200 worth of toys in December, $3,700 worth in January,
$4,400 in February, and $6,100 in March. The wholesale cost is 72 percent of the retail price.
The firm has a receivables period of 30 days, a payables period of 60 days, and buys
inventory one month prior to selling it. Which one of the following statements is correct?
A. The February payments to suppliers are $2,992.
B. The March collections are $3,700.
C. The accounts receivable balance at the end of March is $4,400.
D. The purchases for February are $3,168.
E. The accounts payable balance at the end of January is $5,832.

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Chapter 18 - Short-Term Finance and Planning

83. As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. During the
quarter, the company collected $520 from customers and paid suppliers $360. The company
also paid an interest payment of $20 and a tax payment of $110. In addition, the company
repaid $140 on its long-term debt. What is Callahan's cash balance at the end of the quarter?
A. -$110
B. $320
C. $350
D. $430
E. $490

84. On May 1, your firm had a beginning cash balance of $175. Your sales for April were
$430 and your May sales were $480. During May, you had cash expenses of $110 and
payments on your accounts payable of $290. Your accounts receivable period is 30 days.
What is your firm's beginning cash balance on June 1?
A. $145
B. $155
C. $205
D. $215
E. $265

85. The Mish Mash Store has a beginning cash balance of $440 on March 1. The firm has
projected sales of $610 in February, $680 in March, and $740 in April. The cost of goods sold
is equal to 70 percent of sales. Goods are purchased one month prior to the month of sale. The
accounts payable period is 30 days and the accounts receivable period is 10 days. The firm
has monthly cash expenses of $160. What is the projected ending cash balance at the end of
March? Assume every month has 30 days.
A. $258
B. $461
C. $507
D. $567
E. $621

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Chapter 18 - Short-Term Finance and Planning

86. Fancy Footwear has a line of credit with a local bank in the amount of $80,000. The loan
agreement calls for interest of 7 percent with a compensating balance of 5 percent, which is

based on the total amount borrowed. The compensating balance will be deposited into an
interest-free account. What is the effective interest rate on the loan if the firm needs to borrow
$75,000 for one year to cover operating expenses?
A. 7.37 percent
B. 7.43 percent
C. 7.56 percent
D. 8.17 percent
E. 8.33 percent

87. Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent interest rate. The
loan agreement requires a 2 percent compensating balance, which is based on the total amount
borrowed, and which will be held in an interest-free account. What is the effective interest
rate if the firm borrows $90,000 on the line of credit for one year?
A. 6.42 percent
B. 6.47 percent
C. 6.50 percent
D. 6.58 percent
E. 6.63 percent

88. Rachel's has a $50,000 line of credit with Uptown Bank. The line of credit calls for an
interest rate of 8 percent and a compensating balance of 4 percent. The compensating balance
is based on the total amount borrowed and will be held in an interest-free account. What is the
effective annual interest rate if the firm borrows $35,000 for one year?
A. 7.76 percent
B. 8.00 percent
C. 8.17 percent
D. 8.33 percent
E. 8.42 percent

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Chapter 18 - Short-Term Finance and Planning

89. The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 percent
discount. The average collection period is 34 days. Assume that all accounts are collected in
full. What is the effective annual interest rate on this arrangement?
A. 17.61 percent
B. 18.20 percent
C. 18.36 percent
D. 18.78 percent
E. 19.04 percent

90. New York Bank provides Food Canning, Inc. a $250,000 line of credit with an interest rate
of 1.75 percent per quarter. The credit line also requires that 1 percent of the unused portion of
the credit line be deposited in a non-interest bearing account as a compensating balance. Food
Canning, Inc.'s short-term investments are paying 1.2 percent per quarter. What is the
effective annual interest rate on this arrangement if the line of credit goes unused all year?
Assume any funds borrowed or invested use compound interest.
A. 4.76 percent
B. 4.80 percent
C. 4.89 percent
D. 7.00 percent
E. 7.27 percent

91. The Sports Store has a $100,000 line of credit with City Bank. The loan agreement
requires that 2 percent of the unused portion of the credit line be deposited in a non-interest
bearing account as a compensating balance. The interest rate on the borrowed funds is 1.4
percent per quarter. The Sport Store's short-term investments are paying 1.5 percent per
quarter. What is the effective annual interest rate on the line of credit if The Sports Store

borrows the entire $100,000 for one year? Assume any funds borrowed or invested use
compound interest.
A. 5.72 percent
B. 5.76 percent
C. 6.00 percent
D. 6.08 percent
E. 6.14 percent

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