Discovering Borrowering Causes and Repayment Sources

Question 1

Five Permanent Uses of Funds

Answer 1

Declining Efficiency
Sales Growth
Fixed Asset Expenditures
Change In Trade Credit
Decrease In Net Worth

Question 2

Declining Efficiency

Answer 2

Can be described as the need to carry receivables, or inventory. meet payables or for working captial. Can be caused by slowing AR or inventory turns.

Question 3

Reason for a decrease in asset efficiency

Answer 3

poor Economy

Company may chosse to carry more inventory to give customers more choice

Question 4

Determining the Effect of Growth in Sales on AR

Answer 4

1. Divide Current Year Sales / Prior Year Sales= Growth Factor
2. Multiply Growth Factor By Previous Years Receivable = Effect of Sales Change
3. Subract Prior Years Sales from Effect of Sale Change

Question 5

Determining the Effect of Growth on Inventory

Answer 5

1. Divide Current Year COGS / Prior Year COGS = Growth Factor
2. Multiply Growth Factor by Previous Year Inventory =Effect Sales Growth on COGS
3. Subtract Previous Years Inventory

Question 6

Recognizing Related Costs Increasing Fixed Asset

Answer 6

There can be related costs associated with the acquisition of the asset.

Question 7

Examples of Related Costs of Fixed Asset Acquisition

Answer 7

Set up and installation - soft costs
Out of Pocket costs and lost production costs
Distraction of management
Increase in Inventory
Sales inceases causing working captial increase
Increased maintenance

Question 8

Two Types of Fixed Captial Expenditures

Answer 8

1. Money the company must spend to keep its equipment fully functional, replacing worn equipment,
2. Discreationary spending is money spent to expand capacity, compete, or support busiess plan.

Question 9

How Do you Identify an Appropriate Repayment Source

Answer 9

Nature of borrowing cause
Ability of the company to repay
Creditworthiness

Question 10

A Change in Trade Credit

Answer 10

Can trigger a borrowering cause
A company may choose to shorten is Payables by using credit line to take advantage of discounts
Changes in trader terms are usually long-term

Question 11

Accounts Days Payable Formula for a Manufactuer

Answer 11

Account Payable x 365 / Purchases

Question 12

Accounts Days Payable Formula for a Retailer or Reseller

Answer 12

Accounts Payable x 365 / COGS if purchases is not available

Question 13

Decreases in Net Worth as Borrowering Cause

Answer 13

Caused by losses, payment of dividends, purchases of treasury stock. This loan carry additional risks.

Question 14

Reason Decreased in Net w/orth carry Additional worth

Answer 14

Reduces company’s resources
Repayment usually depends on change rather continuing past purformance and trends
Replacing net worth with debt reduces lenders margin of protection

Question 15

Secondary Sources of Repayment

Answer 15

Any Reliable Source of Repayment Can Be a Back-UP
Liquidation of seasonable inventory
Improving efficiency of AR and Inv
Riding the Trade
Long-term asset

Question 16

Dedicated Source of Repayment

Answer 16

Taking Collateral