Short-Term Financing ** 206

Question 1

what is the operating cycle?

Answer 1

time between when a firm buys inventory and when it receives money back from selling product

Question 2

cash cycle

Answer 2

time between when a firm pays for inventory and when it receives cash from sale of output produced from that inventory

Question 3

CCC formula

Answer 3

inventory days+ a/r days - a/p days

Question 4

inventory days

Answer 4

inventory/ average daily COGS

Question 5

acc receivable days

Answer 5

acc r/average daily sales

Question 6

acc p days

Answer 6

acc p/ average daily COGS

Question 7

how would you describe acc p days?

Answer 7

days it takes to pay out all of the money owed from sales process

Question 8

on timeline a/r days, a/p days, inv days

Answer 8

inventory:
firm buys to when firm sells product
a/p days:
firm buys inventory to when it actually pays
a/r days:
firm sells product and firm actually recieves money for product

Question 9

risk and operating cycle

Answer 9

higher risk if OC is larger/not managed well

Question 10

what does a -CCC mean?

Answer 10

money has to come in before it can go out

Question 11

increase in NWC is

Answer 11

negative and vice versa

Question 12

FCF is what

Answer 12

the cash flow available to investors given the current operations of a firm

Question 13

V formula using FCF

Answer 13

V=FCF/r-g

Question 14

trade credit

Answer 14

arrangement to buy g/s on account without immediate cash so pretty much acc payable
credit that firm extends to customers

Question 15

tax credit 2/10

Answer 15

get 2% cash discount if pay within first 10 days

Question 16

tax credit int payment

Answer 16

discount amount

Question 17

tax credit IR over .. days

Answer 17

interest/principal (amount w discount)
then don’t forget to EAR it

Question 18

if you miss the discount…

Answer 18

adds costs which essentially becomes and int/principal payment

Question 19

benefits of tax credit

Answer 19

simple
convenient
lower transaction costs
flexible source of funds, sometimes only source of funds for a firm

Question 20

reasons to offer tax credit

Answer 20

indirect way to lower cost to some customers
gives more info of credit quality of customer than traditional outside lender
inventory can be used as collateral

Question 21

3 steps to determine credit policy

Answer 21

establish credit statement
establish credit terms
establish collection policy

Question 22

5 C’s of credit

Answer 22

character
capacity
capital
collateral
conditions

Question 23

a/r days definition

Answer 23

number of days for a firm to collect on its sales

Question 24

payment patterns

Answer 24

info about the percentage of monthly sales that is received next month

Question 25

aging schedule

Answer 25

timeframe for recouping receivables
categorizes accounts by number of days been on firms books

Question 26

why should firms monitor acc payable?

Answer 26

to ensure making payments at optimal time

Question 27

pay late/stretch

Answer 27

lowers EAR but not good long term strategy
paying late

Question 28

cash on delivery

Answer 28

pays at the time of delivery

Question 29

cash before delivery

Answer 29

pay before time of delivery

Question 30

2 good reasons to hold inventory

Answer 30

helps avoid stock-outs
addresses seasonality in demand

Question 31

5 costs of holding inventory

Answer 31

acquisition costs
order costs
carrying costs
just in time inventory management
just in case inventory management

Question 32

3 reasons to hold cash

Answer 32

meet day to day transaction balance
precautionary balance (compensate for uncertainty with CFs)
compensating balance (satisfy bank requirements)

Question 33

3 financial statements

Answer 33

income statement
statement of cash flows
balance sheet

Question 34

commercial paper

Answer 34

another short-term form of debt
unsecured
cheap and used by large corporations
int is paid by selling it at initial cost

Question 35

secured loans

Answer 35

loans secured with short-term assets (AR or inv)

Question 36

pledging of acc r

Answer 36

Lender reviews the invoices and decides which credit accounts it will accept as
collateral based on its own credit standards

Question 37

factoring of ar

Answer 37

Firms sell receivables to the lender; lender pays the firm the amount due from its
customers at the end of the firm’s payment period less a factors fee

Question 38

inventory as collateral

Answer 38

Floating, general or blanket lien; all of the inventory is used to secure the loan.
Trust receipts loan or floor planning; distinguishable inventory items are held in a trust as security for the loan.
Warehouse arrangement; inventory that serves as collateral is stored in a separate warehouse.

Question 39

cost of debt considerations

Answer 39

compensating balance requirements
commitment fees
loan organisation fee