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FIN 3113 Chapter 18 Notes
Terms in this set (76)
Short term finance is concerned with current assets and current liabilities, whereas long term finance is concerned with _________.
dividend policy, capital structure and capital budgeting
Short-term assets are listed on the balance sheet in decreasing order of _______.
the time needed to convert them to cash
Current assets are listed on the balance sheet in ________ order.
Current liabilities are firm obligations that will require payment within the _______ period if it is longer than a year.
Examples of current liabilities:
Accounts Payable & Expense accruals
The basic balance sheet identity can be written as Net working capital + fixed assets = long term debt + ________.
Net working capital equals current assets _______ current liabilities
Which are activities that increase cash?
decreasing fixed assets & increasing long term debt
Examples of short term financial decisions:
employee payroll & raising money using commercial paper
Short term finance is primarily concerned with __________.
current assets & current liabilities
Examples of current liabilities:
Accounts Payable, accrued taxes and accrued wages
Another name for short term financial management is _______ management.
Which activities will increase cash?
selling bonds, obtaining a loan and selling stock.
Which represents short term finance concerns?
ordering raw materials and paying for supplies
Steps of the operating cycle in order from first to last:
order inventory, sell the finished product, and collect cash from the sale.
Total asset turnover is defined as:
sales divided by total assets
On disadvantage to a __________ financing policy is that ___________ rates are usually higher than ___________ rates.
Flexible, long term, short term
The time between paying cash for inventory and receiving cash from selling a product is called the _____________.
The operating cycle is the sum of the ______________ period and the accounts receivable period.
One source of short term funds is trade credit. Using this source means a firm will take ____________ time to pay its payables.
Carrying costs will increase with the level of investment in _________________.
Operating cycle is composed of which periods?
inventory period & accounts receivable period
Which are shortage costs?
order costs & safety reserve costs
Compensating balances effectively ________ the interest rate being paid on a loan.
Duty of a cash manager:
Duty of a credit manager:
Duty of a purchasing manager:
Duty of a payables manager:
2 major elements of a firm's short term financial policy are:
the size of the firm's investment in current assets & the financing of current assets.
Some examples of restrictive short term financial policies include:
low investment in inventory, low cash balances, and few credit sales.
The ___________ cycle is the time from when inventory is acquired until cash is collected from the sale of the product.
Shortage costs are those that ______ when the level of investment in current assets is high.
The time taken to collect on credit sales is called the _________ period.
For US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% total assets today primarily because of more efficient:
cash mgmt & inventory mgmt.
Which are characteristics of non-SEC registered commercial paper?
interest often below prime rate, issued by large highly rated firms, & issued directly by the firm.
2 types of accounts receivable financing are _______ and __________.
assignment and factoring
Financing of current assets is measured by the proportion of:
short term debt and long term debt used to finance current assets.
In a situation where short term assets are always financed with short term liabilities and where long term assets are always financed with long-term liabilities, NWC is always ________.
equal to zero
Buying raw materials:
What is the desired level of inventory?
Sell a product:
Should credit be extended?
Make a product:
what technology should be used?
Pay cash for purchases:
Should money be borrowed or cash reserves used?
A restrictive short term financing strategy implies ________________.
possible cash shortages and a small investment in NWC
Some examples of short term flexible financing policies include:
large cash balances & large investments in inventory
What is the inventory period if the inventory turnover is 10 times?
Non-committed lines of credit _________.
are informal arrangements & generally specify a maximum amount that can be borrowed
Sources of cash can involve increasing an ____________ account.
liability and equity
The operating cycle equals the sum of the inventory period and the ________ period.
The opportunity costs of holding liquid assets are called _________ costs.
Some examples of restrictive short term financial policies are:
Few credit sales, low cash balances, and low investment in inventory
Example of a flexible short-term financial policy:
making large investments in inventory
Commercial paper is an example of a:
debt security and short term security
Inventory loans use inventory as ________.
Which of the following increase the cash cycle?
a longer inventory period and a longer receivables period.
A short term financial policy involving a higher proportion of long term debt than short term debt is classified as an _____________ policy.
Carrying costs ________ with the level of investment in current assets.
Example of a restrictive short term financial policy:
keeping low cash balances
The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at _________.
Difference between the operating cycle and the accounts payable period is the ___________.
Examples of short term flexible financing policies include:
large investments in inventory and large cash balances.
Being low on cash can force a firm to _____________.
sell marketable securities, default on debt and borrow money
An _____________ bank loan requires no security or collateral
Generally used as security for short term secured loans.
Inventory & accounts receivable
Time from the acquisition of inventory to when the inventory is paid for is called the _______________ period.
A product begins its accounting life as inventory and is converted to an _______ when it is sold on credit.
Typical data needed to calculate operating and cash cycles:
COGS, average time it takes to sell inventory & average acct rec collection period.
loans financed with inventory as collateral are called ___________________.
Which short term financial managers are involved with selling on credit?
Credit manager, controller, and marketing manager
Other important sources of short term financing besides secured and unsecured borrowing for a company are:
Commercial paper & trade credit
Used as collateral for short term secured loans:
Inventory & acct rec
Time it takes to collect on the sale of a product is called the __________.
acct rec period
Activities that decrease cash:
increasing fixed assets & decreasing equity
The main problems with maturity mismatching are that it ___________.
requires frequent refinancing & is risky
The marketing manager may want easier credit terms to increase sales, but the credit manager may worry about ___________.
higher receivables and bad debt risk
Typical inventory loans:
field warehouse financing, blanket inventory lien and trust receipt
Shorter the cash cycle, the lower the firm's investment in ____________.
acct rec and inventories
THIS SET IS OFTEN IN FOLDERS WITH...
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