Chapter 16

Question 1

short-term financial management is called

Answer 1

working capital management

Question 2

operating cycle

Answer 2

The time period between the acquisition of inventory and the collection of cash from receivables

Question 3

inventory period

Answer 3

The time it takes to acquire and sell inventory.

Question 4

accounts receivable period

Answer 4

The time between sale of inventory and collection of the receivable.

Question 5

accounts payable period

Answer 5

The time between receipt of inventory and payment for it.

Question 6

cash cycle

Answer 6

The time between cash disbursement and cash collection.

Question 7

cash flow time line

Answer 7

Graphical representation of the operating cycle and the cash cycle.

Question 8

inventory turnover =

Answer 8

COGS/Average inventory

Question 9

inventory period =

Answer 9

365 days/inventory turnover

Question 10

receivable turnover =

Answer 10

credit sales/average accounts receivable

Question 11

Receivables period =

Answer 11

365 days/receivables turnover

Question 12

operating cycle =

Answer 12

inventory period + accounts receivable period

Question 13

payables turnover =

Answer 13

COGS/average payables

Question 14

payables period =

Answer 14

365 days/ payables turnover

Question 15

cash cycle =

Answer 15

operating cycle - account payable period

Question 16

flexible short-term financial policy

Answer 16

Maintain a relatively high ratio of current assets to sales, and less short-term debt and more long-term debt. Also called conservative short-term financial policy.

Question 17

restrictive short-term financial policy

Answer 17

maintain a low ratio of current assets to sales. Also called aggressive short-term financial policy

Question 18

Carrying costs

Answer 18

Costs that rise with increases in the level of investment in current assets.

Question 19

shortage costs

Answer 19

Costs that fall with increases in the level of investment in current assets.

Question 20

cash-out

Answer 20

a firm runs out of cash and cannot readily sell marketable securities, it may have to borrow or default on an obligation

Question 21

Stock-out

Answer 21

Run out of inventory

Question 22

Types of shortage costs

Answer 22

Trading (brokerage costs), or order (inventory production or setup costs), costs
Costs related to lack of safely reserves (loss of sales or customer goodwill, disruption of production schedules)

Question 23

cash budget

Answer 23

A forecast of cash receipts and disbursements of the next planning period

Question 24

line of credit

Answer 24

A formal (committed) or informal (non-committed) prearranged, short-term bank loan.

Question 25

accounts receivable financing

Answer 25

A secured short-term loan that involves either the assignment or factoring of receivables.

Question 26

inventory loans

Answer 26

A secured short-term loan to purchase inventory.

Question 27

forms of inventory loans

Answer 27

blanket inventory liens trust receipts field warehouse financing

Question 28

blanket inventory lien

Answer 28

gives the lender a lien against all the borrower's inventories

Question 29

trust receipt

Answer 29

a device by which the borrower holds specific inventory in "trust" for the lender. Also called floor planning.

Question 30

Field warehouse financing

Answer 30

a public warehouse company acts as a control agent to supervise the inventory for the lender

Question 31

public warehouse company

Answer 31

an independent company that specializes in inventory management

Question 32

assigning receivables

Answer 32

the lender has the receivables as security, the borrower is still responsible if a receivable can't be collected

Question 33

conventional factoring

Answer 33

the receivable is discounted and sold to the lender (the factor). Once it is sold, collection is the factor's problem, the factor assumes the full risk of default on bad accounts.

Question 34

maturity factoring

Answer 34

the factor forwards the money on an agreed-upon future date

Question 35

commercial paper

Answer 35

Short-term notes issued by large and highly rated firms. Typically ranging up to 270 days.

Question 36

trade credit

Answer 36

Borrowing from suppliers by extending the accounts payable period. Can be very expensive.