Chapter 5 Essentials

Question 1

Chapter 5 focuses on

Answer 1

Day to day cash flow

Question 2

Cash Flow Cycle

Answer 2

Indicates the length of time it takes for a firm to convert its inputs into cash accounting for both converting credits sales into cash and paying suppliers

Question 3

Decrease in current assets
Increase in current liabilities
Decrease in fixed assets
Increase in long term debt
Increase in retained earnings
Increase in equity

Answer 3

Sources of cash

Question 4

Uses of cash

Answer 4

Increase in current assets
Decrease in current liabilities
Increase in fixed assets
Decrease in long term debt
Decrease in repainted earning
Decrease in new equity

Question 5

Cash flow related to operating activities primarily affects which two accounts?

Answer 5

Current Assets and Current Liabilities

Question 6

The two key current asset items affected by cash flow are?

Answer 6

Inventory and AR

Question 7

The key current liabilities item is

Answer 7

AP

Question 8

Why is inventory management important?

Answer 8

• Inventory affects sales and profits
• Lack of inventory = opportunity cost
• Profitability affects investors

Question 9

Why accounts receivable management is important

Answer 9

• Trade credit is a competitive advantage
• The cost is delayed cash flow

Question 10

Why accounts payable management is important

Answer 10

• Using AP wisely is a short-term fund
• it can be a cost to lose early discounts

Question 11

3 ways to reduce or eliminate a working capital gap

Answer 11

1 decrease age of inventory
2 decrease age of AR
3 increase age of AP

Question 12

The most common source of short-term financing, especially for small and medium sized firms

Answer 12

Banks Loans

Question 13

Simple promises or IOUs to a firm to repay the bank a certain amount of money by a specified date a specified rate are

Answer 13

Promissory Notes

Question 14

Rates may be fixed or variable which are often tied to a specific benchmark such as the

Answer 14

Prime Rate or LIBOR

Question 15

An alternative bank funding vehicle which allows a borrower to tap into an agreed-on max loan amount on an as-needed basis

Answer 15

Line of Credit

Question 16

Another option or an interim loan provided by a bank before long-term funding can be obtained

Answer 16

Bridge Loan

Question 17

These provide lenders with protection, as they are backed by assets of the firm as collateral

Answer 17

Secured Loan

Question 18

Another form of receivables secures financing whereby the firm sells receivables to a lender at a discount to the actual value of the receivables

Answer 18

Factoring

Question 19

If inventory is used to secure a loan, the claim that the lender has against the firm’s inventory is called a

Answer 19

Lien

Question 20

A short-term debt issued by a firm, usually with a repayment term of up to nine months

Answer 20

Commercial Paper

Question 21

A source of short-term financing most common in international trade, such as when a firm exports goods

The seller or exporting firm arranges a draft or an IOU and sends it to the buyer’s or importer’s bank indicating payment terms

The buyer then indicates to its bank that it has accepted that debt, turning the draft into a what?

If the buyer can’t pay, the bank will pay instead

Answer 21

Banker’s Acceptance

Question 22

BAs are bought and sold in the marketplace and are a common investment in

Answer 22

Money Market Funds

Question 23

Relevance for managers

Answer 23

• Know how to use operating cash wisely