Cash and Liquidity Management

Topic

Short-Term Financial Planning and Cash and Liquidity Management

Instructions

  1. Which of the following terms is defined as the length of time between the purchase of inventory and the date of receipt of cash from the sale of that inventory is called the:
    A. Inventory period.
    B. Accounts Receivable period.
    C. Accounts Payable period.
  2. Operating cycle.
    E. Cash cycle.
  3. Which one of the following transactions is a source of 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
  4. Which TWO of the following transactions represent uses of cash?
    A. Collecting a receivable
    B. Increasing inventory
    C. Obtaining a bank loan
  5. Issuing common stock
    E. Paying a supplier for previous purchases
  6. 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.
  7. You are the CFO of a business-seasonal firm specializing in products related to water sports. The firm purchases inventory one month before it is sold and pays for its all purchases 60 days after the invoice date. Sales are always highest during the months of July and August. You are in the process of preparing the cash disbursements section of your company’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.
  8. Media Modeling Insights (MMI) has $250,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Citibank. Which one of the following statements correctly describes this transaction?
    A. MMI will immediately receive $250,000 and will have no further obligation related to these receivables.
    B. MMI will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables.
    C. Citibank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays MMI a discounted value for its receivables.
    D. Citibank accepts full responsibility for collecting the accounts receivables and pays MMI a discounted price for the accounts collected after the normal collection period has elapsed.
    E. MMI receives the full amount of its receivables upon assignment but must reimburse Citibank for any uncollected account.
  9. 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
  10. A lockbox is a:
    A. special safe used by a firm for overnight storage of any cash or undeposited checks.
    B. special safe used by a firm that can only be opened at prespecified times of the day.
    C. box located in a bank’s vault that is rented by a firm and used to hold unprocessed checks.
    D. special post office box which can only be opened by prespecified postal inspectors for direct delivery to the addressee.
    E. post office box strategically located so that a firm’s receivables can be collected faster.
  11. Forensicon Inc. has branch operations in 3 states. Each branch deals with a local bank. However, all excess funds in these branch bank accounts are transferred on a daily basis to the firm’s primary bank located near the firm’s home office. This routine of transferring cash to the primary bank on a regular basis is referred to as:
    A. cash concentration.
    B. strategic cash disbursement.
    C. transfer flotation.
    D. payables management.
    E. float management.
    10. Which of the following will reduce collection time?
    I. billing customers by mail rather than electronically
    II. accepting debit cards but not checks as payment for a sale
    III. offering cash discounts for early payment
    IV. reducing the processing delay by one day
    A. I and II only
    B. I and III only
    C. I, II, and III only
    D. II, III, and IV only
    E. I, II, III, and IV
  12. Which one of the following statements is correct?
    A. Funds received via automated clearinghouse transfers are available that day.
    B. A depository transfer check is the most costly means of transferring funds into a cash concentration account.
    C. The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers.
    D. Concentration accounts are used to transfer funds to lockbox locations as needed.
    E. The most expedient means of transferring funds into a concentration account is a wire transfer.
  13. Money market securities have which of the following characteristics?
    I. long maturities
    II. low default risk
    III. high degree of liquidity
    IV. low rates of return
  14. I and III only
    B. II and III only
    C. I and IV only
    D. II, III, and IV only
    E. I, II, III, and IV
  15. Which of the following statements is correct?
    A. A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time.
    B. The cost of borrowing affects the target cash balance of a firm.
    C. Management’s desire to maintain a low cash balance has no effect on the borrowing needs of a firm.
    D. The target cash balance increases as the interest rate rises.
    E. The target cash balance decreases as the order costs increase.

SHOW YOUR CALCULATIONS FOR #14-#25.

  1. A local retailer has sales of $950,000 and cost of goods sold of $627,400. At the beginning of the year, the inventory was $62,200. At the end of the year, the inventory balance was $70,000. What is the inventory turnover rate? (Assume a 365-day year)
  2. TCI Air Freight has sales of $625,000, costs of goods sold of $375,000, average accounts receivable of $32,520, and average accounts payable of $21,600. How long does it take for the firm’s credit customers to pay for their purchases? (Assume a 365-day year)
  3. Hudson Enterprises has sales of $1,040,000, average accounts receivable of $41,400 and average accounts payable of $29,250. The cost of goods sold is equivalent to 54% of sales. How long does it take Hudson to pay its suppliers? (Assume a 365-day year)
  4. Bradco Supply currently has an operating cycle of 62 days. The company is analyzing some operational changes, which are expected to decrease the accounts receivable period by 2 days and increase the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 24 to 28 times per year. If all of these changes are adopted, what will the company’s new operating cycle be?
  5. Asendia USA has an inventory period of 43 days, an accounts payable period of 28 days, and an accounts receivable turnover rate of 36. What is the length of the cash cycle? (Assume a 365-day year)
  6. As of the beginning of the quarter, O’Neill’s Pub Supplies had a cash balance of $460. During the quarter, the company collected $520 from customers and paid suppliers $330. The company also paid an interest payment of $25 and a tax payment of $150. In addition, the company repaid $200 on its long-term debt. What is O’Neill’s cash balance at the end of the quarter?
  7. At the beginning of the year, you have an outstanding short-term loan of $2,575 which was used to cover your cash needs for the previous year. The interest expense for the year is $305. The projected net cash flow for this year is $1,045, prior to any payment of principal or interest on this loan. What is your anticipated loan balance at year end?
  8. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587. These checks clear the bank in an average of 2 days. What is the average amount of the disbursement float?
  9. On average, your firm receives 62 checks a day from customers. These checks, on average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses 38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days. What is the average amount of the collection float?
  10. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank. The current available balance is $11,407. What is the status of the net float?
  11. It takes your firm 4.5 days to prepare and mail out all the monthly statements to your customers. On average, the mail time between your firm and your customers is 2.6 days. Customer checks take an average of 1.8 days to clear the bank. You have determined that your total average collection time is 6.1 days. How long, on average, does it take your firm to process the payments from customers?
  12. Nelson Tree Disposal receives an average of 400 checks a day. The average amount per check is $525. The firm is considering a lockbox system which it anticipates will reduce its average collection time by 2.5 days. The daily interest rate on Treasury bills is 0.016% (not 1.6%). What is the amount of the expected daily savings of the lockbox system?

Answer preview

Question 1:

  1. Operating cycle.

Question 2:

  1. Accepting credit from a supplier

Question 3:

  1. Increasing inventory
  2. Paying a supplier for previous purchases

Question 4:

  1. The longer the cash cycle, the more likely a firm will need external financing.

Question5:

  1. Payments to suppliers will be highest during the months of August and September.

Question 6:

  1. Citibank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays MMI a discounted value for its receivables.

Question7:

  1. I, II, and III only

Word count: 514