Q&A Hero

Q: Managing a firm's liquidity is basically the same as managing a firm's net working capital.

Q: Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Q: Net working capital provides a very useful summary measure of a firm's short-term financing decisions.

Q: Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities.

Q: J.B. 's Wholesale Club has current assets of $12.25 million and current liabilities of $14 million. Which of the following is possible. A) J.B. makes efficient use of its current assets. B) J.B. may be at some risk of being unable to pay its bills. C) J.B. appears to be overinvesting in current assets. D) Either or both A and B may be true.

Q: Solstice Corporation has current assets of $10 million and current liabilities of $8 million. Solstice's current ratio is ________ and its net working capital is ________. A) 1.25, $10 million B) 1.25, $2 million C) 2, $1.25 million D) .8, ($2 million)

Q: Which of the following is most likely to occur if a firm under-invests in net working capital? A) The firm might not have sufficient cash to pay its bill in a timely manner. B) The firm might not have adequate inventory to meet the needs of its customers. C) The firm could be losing sales because its terms of sale are too strict. D) All of the above.

Q: Which of the following is most likely to occur if a firm over-invests in net working capital? A) The current ratio will be lower than it should be. B) The quick ratio will be lower than it should be. C) The return on investment will be lower than it should be. D) The times interest earned ratio will be lower than it should be.

Q: Net working capital refers to which of the following? A) Current assets B) Current assets minus current liabilities C) Current assets minus inventory D) Current assets divided by current liabilities E) Current assets minus inventory divided by current liabilities

Q: Within the context of working capital management: A) as the firm increases its investment in working capital, there is a corresponding increase in its profits. B) current liabilities provide a flexible means of financing the firm's fluctuating needs for assets. C) the use of current liabilities or short-term debt as opposed to long-term debt subjects the firm to less risk of illiquidity. D) all of the above.

Q: Which of the following will reduce the liquidity of a firm? An increase in: A) short-term notes payable. B) accounts payable. C) current assets. D) both A and B.

Q: The risk of a firm not being able to pay its bills on time is called: A) illiquidity. B) insolvency. C) capital inadequacy. D) float.

Q: In general, the greater a firm's reliance upon short-term debt or current liabilities, the lower the: A) liquidity. B) flexibility. C) certainty of interest costs. D) both A and C.

Q: A decrease in ________ would increase net working capital. A) accounts payable B) accounts receivable C) cash D) equipment

Q: An increase in ________ would increase a firm's liquidity. A) notes payable B) inventories C) cash D) both B and C

Q: Which of the following would be considered an issue that is related to the management of working capital? A) How much inventory should the firm maintain? B) How should a firm finance its current assets? C) To whom should the firm grant trade credit? D) All of the above

Q: Which of the following could offset the higher risk exposure a company would face if it s current ratio and net working capital were relatively low.? A) Its current assets would need to be highly liquid. B) Its accounts receivable collection policy could increase the average collection period. C) It could offer no discounts for early payment by its customers. D) It could buy back some of its shares in the open market in order to reduce its equity.

Q: Total assets must equal the sum of which sources of financing? A) Spontaneous B) Temporary C) Permanent D) Spontaneous, temporary and permanent

Q: P. Noel's Inc.'s current ratio is 2. Current liabilities are $500,000. P. Noel's current assets equal ________ and net working capital is ________. A) $500,000 and $1,000,000 B) $500,000 and $250,000 C) $1,000,000 and $500,000 D) $500,000 and $500,000

Q: An increase in ________ would increase net working capital. A) plant and equipment B) accounts payable C) accounts receivable D) both B and C

Q: Spontaneous sources of financing include: A) accounts payable and accrued expenses. B) notes payable and mortgages payable. C) long-term debt and capital leases. D) common stock and paid-in capital.

Q: Marjen Manufacturing has purchases equal to 40% of sales. They purchase one month prior to sales and pay one month after sales. Given the following sales forecast, calculate Marjen's payments for March. Projected Sales January $80,000 February $100,000 March $120,000 A) $40,000 B) $60,000 C) $80,000 D) $100,000

Q: The percent-of-sales method of forecasting makes which of the following assumptions? A) That some assets do not increase in direct proportion to an increase in sales. B) The accounts receivable average collection period will remain constant throughout the forecast period. C) The firm may acquire some "lumpy" assets. D) All of the above. E) None of the above.

Q: Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were $3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash $70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accruals for the fiscal year ending 2002. A) $890,001 B) $412,316 C) $267,319 D) $350,814

Q: Assume that Helaron, Inc. has sales of $83 million and fixed assets of $22.4 million. The corporation utilizes the percent-of-sales method of financial forecasting. If Helaron is expected to generate sales of $94 million next year, what will the firm's investment in fixed assets be? A) $19.8 million B) $28.8 million C) $16.2 million D) $25.4 million E) None of the above

Q: Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million. The corporation utilizes the percent-of-sales method of financial forecasting. If Hercules is expected to generate sales of $31 million next year, what will the firm's investment in current assets be? A) $8.3 million B) $4.0 million C) $6.2 million D) $5.0 million E) None of the above

Q: Assume that Calamar Corp. has sales of $7.5 million and accounts payable of $450,000. The corporation utilizes the percent-of-sales method of financial forecasting. If Calamar is expected to generate sales of $9 million next year, what will the firm's accounts payable be? A) $540,000 B) $450,000 C) $405,000 D) None of the above

Q: Assume that Zybo, Inc. has sales of $10 million and inventory of $2 million. The corporation utilizes the percent-of-sales method of financial forecasting. If Zybo is expected to generate sales of $14 million next year, what will the firm's investment in inventory be? A) $1.4 million B) $2.0 million C) $2.8 million D) None of the above

Q: Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were $3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash $70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast accounts payable for the fiscal year ending 2002. A) $212,036 B) $405,290 C) $619,619 D) $155,000

Q: The percent-of-sales method of forecasting makes which of the following assumptions? A) The inventory turnover will remain the same during the forecast period. B) The profit margin will remain constant during the forecast period. C) Cash, as a percent of sales, will remain constant throughout the forecast period. D) All of the above. E) None of the above.

Q: The preparation of pro forma financial statements accomplishes which of the following objectives? A) It allows management to pinpoint a firm's optimal stock price. B) It is essential if the firm is to accurately estimate its weighted average cost of capital. C) It assists management in making decisions with respect to raising the capital that is needed for growth. D) It pinpoints periods when the firm will have short-term cash surpluses.

Q: Under which of the following conditions would the percent-of-sales method of financial forecasting be most accurate? A) If assets must be purchased in discrete quantities B) When asset requirements can be accurately forecasted as a constant percent of sales C) If economic circumstances beyond a firm's control drastically change from one year to the next D) When economies of scale can be realized from investing in specific assets

Q: Which of the following are considered to be spontaneous sources of financing (i.e., they arise naturally during the course of doing business)? A) Notes payable and common stock B) Accounts receivable and bonds C) Fixed assets and inventory D) Accounts payable and accrued expenses

Q: The "percentage" used in the percent-of-sales calculation can be obtained from: A) the most recent financial statement item as a percent of current sales. B) an average computed over several years. C) an analyst's judgment. D) all of the above.

Q: A sales forecast for the coming year would reflect: A) any past trend which is expected to continue. B) the influence of any events that might materially affect the past trend. C) both A and B. D) neither A nor B.

Q: The first step involved in predicting financing needs is: A) projecting the firm's sales revenues and expenses over the planning period. B) estimating the levels of investment in current and fixed assets that are necessary to support the projected sales. C) determining the firm's financing needs throughout the planning period. D) none of the above.

Q: Which of the following statements about the percent-of-sales method of financial forecasting is true? A) It is the least commonly used method of financial forecasting. B) It is a much more precise method of financial forecasting than a cash budget would be. C) It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues. D) It projects all liabilities as a fixed percentage of sales.

Q: Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002; sales were $3,450,000 in fiscal 2001. Assume the following figures for the fiscal year ending 2001: cash $70,000; accounts receivable $250,000; inventory $400,000; net fixed assets $520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales method to forecast cash for the fiscal year ending 2002. A) $120,725 B) $75,003 C) $216,418 D) $319,604

Q: The percent-of-sales method can be used to forecast: A) expenses. B) assets. C) liabilities. D) all of the above.

Q: What is the most important ingredient in developing a firm's financial plan? A) A forecast of sales revenues B) Determining the amount of dividends to pay shareholders C) Projecting the rate of interest on proposed new debt D) Deciding upon which method of depreciation a firm should utilize

Q: Why is financial planning important in a highly uncertain financial environment.

Q: What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?

Q: Discuss the basic functions that budgets perform for a firm.

Q: The key ingredient in a firm's financial planning is the sales forecast.

Q: The financial planning process is the responsibility of: A) financial analysts. B) operations staff. C) marketing staff D) financial analysts, marketing staff, and operations staff interacting as a group.

Q: Typical steps in the financial planning process include: A) preparing a sales forecast. B) analyzing cost data. C) estimating tax expense. D) all of the above.

Q: Long-term financial planning results in: A) a cash budget. B) pro forma financial statements. C) a sales forecast for the next 1 to 3 years. D) a general narrative detailing near-term scenarios.

Q: Short-term financial planning results in: A) a cash budget. B) pro forma financial statements. C) a sales forecast for the next 1 to 3 years. D) a general narrative detailing near-term scenarios.

Q: Short-term financial plans span a period of: A) up to five years. B) one to three years. C) a year or less. D) 1 month or less.

Q: Strategic planning encompasses all of the following EXCEPT: A) a cash budget. B) a description of the firm's core competencies and activities. C) a definition of the firm's customers. D) a description of the firm's competitors and its own competitive strengths and weaknesses.

Q: Long-term financial plans typically encompass: A) 6 to 12 months. B) about 5 years. C) 5 to 10 years. D) the entire lifecycle of the corporation.

Q: Because financial planning usually takes place in a highly uncertain environment, A) it is rarely worth the time and expense. B) time horizons should be limited to a few months. C) it is important to develop contingency plans to respond to unexpected events. D) it should avoid such specific issues as what sources of financing to use.

Q: Types of plans that businesses typically use to guide their operations include: A) strategic plans. B) long-range financial plans. C) short-range financial plans. D) all of the above.

Q: The ZYX Corporation is planning to request a line of credit from its bank and wants to estimate its cash needs for the month of September. The following sales forecasts have been made for 2005: July $500,000 August $400,000 September $300,000 October $200,000 November $100,000 Collection estimates were obtained from the credit collection department as follows: 20% collected within the month of sale; 70% collected the first month following the sale; and 10% collected the second month following the sale. Payments for labor and raw materials are typically made in the month in which these costs are incurred. Total labor and raw material costs each month are 50% of sales. General administrative expenses are $30,000 per month, lease payments are $10,000 per month, and depreciation charges are $20,000 per month. The corporation tax rate is 40%; however, no corporate taxes are paid in September. Prepare a cash budget for September.

Q: The treasurer for Brookdale Clothing must decide how much money the company needs to borrow in July. The balance sheet for June 30, 2004 is presented below: Brookdale Clothing Balance Sheet 30-Jun-04 Cash $75,000 Accounts payable $400,000 Marketable securities 100,000 Long-term debt 300,000 Accounts receivable 300,000 Common stock 100,000 Inventory 250,000 Retained earnings 200,000 Total current assets 725,000 Total liabilities and Fixed assets 275,000 stockholder's equity $1,000,000 Total assets $1,000,000 The company expects sales of $250,000 for July. The company has observed that 25% of its sales is for cash and that the remaining 75% is collected in the following month. The company plans to purchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60% of purchases is paid in the following month. Salaries are $100,000 per month, lease payments are $50,000 per month, and depreciation charges are $20,000 per month. The company plans to purchase a new building for $200,000 in July and sell its marketable securities for $100,000. If the company must maintain a minimum cash balance of $50,000, how much money must the company borrow in July?

Q: The cash budget for Parker Process Meats, Inc. for the fourth quarter of 2004 is given below:Parker Process Meats, Inc.Cash Budget for the Three Months Ending December 31, 2004Cash receiptsOct.Nov.Dec.Total collections$31,050$4,050$49,950Cash disbursements:Purchases44,55048,60052,650Wages and salaries7,4257,4257,425Other expenses2,0251,350675Taxes17,415Total disbursements$54,000$57,375$78,165The expected sales for the period are as follows:Oct.: $86,400 Nov.: $91,800 Dec.: $83,700The total depreciation expense for the period will be $8,775. An interest payment on outstanding debt of $15,000 will be made in December. Using the information given, construct a pro forma income statement for the final quarter of 2004 for Parker.

Q: Broad Cloth, Inc.'s average collection period is 15 days. The vice-president of marketing has projected credit sales of $2. million for October, $2.5 million for November and $3 million for December. Purchases equal 60% of sales and are made one month in advance of budgeted sales. Payments are made 1 month after the date of purchase. Compute payments for purchases for the months of November and December.

Q: Broad Cloth, Inc.'s average collection period is 15 days. The vice-president of marketing has projected credit sales of $2. million for October, $2.5 million for November and $3 million for December. Compute cash collections for November and December. Assume that all months have 30 days.

Q: A budget is a forecast of future events.

Q: The cash budget ignores discretionary financing.

Q: The cash budget can be used to provide an estimate of the firm's future financing needs.

Q: Depreciation expense is always included in the cash budget as it reflects the impact of fixed asset purchases.

Q: The percent-of-sales method is more detailed than the cash budget method.

Q: Depreciation expense is a deduction from cash flow in the cash budget.

Q: The cash budget consists of all the following factors EXCEPT: A) cash receipts. B) cash disbursements. C) new financing needed. D) net income.

Q: The preparation of a cash budget serves which of the following purposes? A) To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm's common stock B) To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period C) To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period D) To estimate the amount of sales volume that would be required in order to achieve the break-even point

Q: Which of the following expenses should be included as a cash outlay in the preparation of a cash budget? A) The payment of accounts payable B) The payment of depreciation expense C) The payment of accrued income taxes D) All of the above

Q: Home to House Distributors is preparing a cash budget. The initial conclusion is that the firm will need to borrow more money than its bank is willing to lend. Which of the following actions could Home to House Distributors perform to reduce its need for bank financing this year? A) Pay cash for purchasing inventory instead of having to rely on trade credit B) Prepay next year's quarterly income tax payments C) Try to collect the firm's accounts receivable faster D) Purchase larger quantities of inventory to take advantage of trade discounts

Q: Which of the following will decrease cumulative borrowing on the cash budget? A) A decrease in interest expense B) A decrease in collections C) An increase in equipment purchases D) Both A and B

Q: Which of the following is NOT an element of the cash budget? A) Cash receipts B) Cash disbursements C) Depreciation expense D) New financing needed

Q: As of December 31, Budget, Inc. had a cash balance of $50,000. December sales were $150,000 and are expected to be $100,000 in January. 20% of sales in any month are cash sales, and 80% of sales are collected during the following month. In January, Budget is expected to have total cash disbursements of $120,000, and Budget requires a minimum cash balance of $50,000. Budget's expected cash receipts for January are: A) $80,000. B) $100,000. C) $110,000. D) $140,000.

Q: Your firm is trying to determine its cash disbursements for the next two months (June and July). In any month, the firm makes purchases of 60% of that month's sales, which are paid the following month. In addition, the firm incurs the following costs every month and pays for them in the month the expenses are incurred: wages/salaries of $10,000, rent of $4,000, and miscellaneous cash expenses of $1,000. Depreciation amortized on a monthly basis is $2,000. June's sales are expected to be $100,000, and July's sales are expected to be $150,000. Cash disbursements for the month of July are expected to be: A) $105,000. B) $107,000. C) $77,000. D) $75,000.

Q: The primary purpose of a cash budget is to: A) determine the level of investment in current and fixed assets. B) determine accounts payable. C) provide a detailed plan of future cash flows. D) determine the estimated income tax for the year.

Q: Table 3Thompson Manufacturing Supplies' projected sales for the first six months of 2004 are given below.Jan.$250,000April$400,000Feb.$300,000May$450,000March$400,000June$400,00040% of sales is collected in the month of the sale, 50% is collected in the month following the sale, and 10% is written off as uncollectible. Cost of goods sold is 70% of sales. Purchases are made the month prior to the sale and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $50,000/month. The company's cash balance as of February 1, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Thompson has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 3, what is Thompson's projected cash balance as of April 1, 2004?A) $32,000B) $4,300C) $25,000D) None of the above

Q: Table 3Thompson Manufacturing Supplies' projected sales for the first six months of 2004 are given below.Jan.$250,000April$400,000Feb.$300,000May$450,000March$400,000June$400,00040% of sales is collected in the month of the sale, 50% is collected in the month following the sale, and 10% is written off as uncollectible. Cost of goods sold is 70% of sales. Purchases are made the month prior to the sale and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $50,000/month. The company's cash balance as of February 1, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Thompson has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 3, what is Thompson's projected cumulative borrowing as of March 1, 2004?A) $85,000B) $45,000C) $70,000D) - 0 -

Q: Table 3Thompson Manufacturing Supplies' projected sales for the first six months of 2004 are given below.Jan.$250,000April$400,000Feb.$300,000May$450,000March$400,000June$400,00040% of sales is collected in the month of the sale, 50% is collected in the month following the sale, and 10% is written off as uncollectible. Cost of goods sold is 70% of sales. Purchases are made the month prior to the sale and are paid during the month the purchases are made (i.e. goods sold in March are bought and paid for in February). Total other cash expenses are $50,000/month. The company's cash balance as of February 1, 2004 will be $40,000. Excess cash will be used to retire short-term borrowing (if any). Thompson has no short-term borrowing as of February 28, 2004. Assume that the interest rate on short-term borrowing is 1% per month. The company must have a minimum cash balance of $25,000 at the beginning of each month. Round all answers to the nearest $100.Based on the information in Table 3, what are Thompson's projected total receipts (collections) for March?A) $400,000B) $310,000C) ($20,000)D) $320,000

Q: Miller Metalworks had sales in November of $60,000, in December of $40,000, and in January of $80,000. Miller collects 40% of sales in the month of the sale and 60% one month after the sale. Calculate Miller's cash receipts for January. A) $44,000 B) $56,000 C) $64,000 D) $72,000

Q: Table 2 Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 to be as follows: Jan. $50,000 April $180,000 Feb. $60,000 May $240,000 March $100,000 June $240,000 Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1, 2004 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1, 2004. Assume that the interest rate on short-term borrowing is 1% per month. Based on the information in Table 2, how much short-term financing is needed by March 30, 2004? A) $110,000 B) $15,000 C) $70,000 D) $85,000

Q: Table 2 Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 to be as follows: Jan. $50,000 April $180,000 Feb. $60,000 May $240,000 March $100,000 June $240,000 Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1, 2004 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1, 2004. Assume that the interest rate on short-term borrowing is 1% per month. Based on the information in Table 2, what was Fielding's projected loss for March? A) $184,000 B) $110,000 C) $84,000 D) None of the above

Q: Table 2 Fielding Wilderness Outfitters had projected its sales for the first six months of 2004 to be as follows: Jan. $50,000 April $180,000 Feb. $60,000 May $240,000 March $100,000 June $240,000 Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1, 2004 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). Fielding has no short-term borrowing as of March 1, 2004. Assume that the interest rate on short-term borrowing is 1% per month. Based on the information contained in Table 2, what are Fielding's projected total receipts (collections) for April? A) $124,000 B) $180,000 C) ($4,000) D) $36,000