81. The percent of sales method does not accurately estimate the balances for lumpy assets.
Which of the following statements best describes the possible errors?
a. If excess capacity exists, the percent of sales method will overestimate asset
b. The percent of sales method consistently overestimates the forecasted balances of
c. The percent of sales method consistently underestimates the forecasted balances of
d. If fixed assets are utilized at full capacity currently, the percent of sales method will
underestimate the forecasted fixed asset balance.
82. The accuracy of the percent of sales forecast method is impaired if:
a. scale economies are present for assets.
b. asset needs are independent of sales level.
c. assets must be purchased in discrete quantities.
d. All of the above impair the accuracy of the percent of sales forecast method.
83. Which of the following statements is MOST correct concerning the relationship between a
company’s cash budget and its income statement?
a. If net income is positive, then cash flow could be positive or negative, but if net
income is negative, cash flow must also be negative.
b. If net income is positive, then cash flow must be positive.
c. Cash flow could be positive whether net income is positive or negative.
d. If net income is positive for 3 or more months in a row, then cash flow must be
CraftCo, Inc.’ projected sales for the first six months of 2012 are given below:
Jan. $500,000 April $490,000
Feb. $740,000 May $740,000
Mar. $380,000 June $610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month following
the sale, and the remaining 10% are collected in the second month following the sale.
Cost of goods sold is 60% of sales. Purchases are made in the month prior to the sales, and
payments for purchases are made in the month of the sale. Total other cash expenses are
$40,000/month. The company’s cash balance as of February 28, 2012 will be $25,000.
Excess cash will be used to retire short-term borrowing (if any). CraftCo, Inc. has no
short term borrowing as of February 28, 2012. Assume that the interest rate on short-term
borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at
the beginning of each month.
84. What is CraftCo, Inc.’s total cash receipts for April 2010?
85. A company collects 25% of its sales during the month of sale, 65% one month after the
sale, and 10% two months after the sale. The company expects sales of $50,000 in August,
$80,000 in September, $90,000 in October, and $60,000 in November. How much money
is expected to be collected in October?
LPD Logistics, Inc.’s projected sales for the first six months of 2010 are given below.
Jan. $300,000 April $350,000
Feb. $350,000 May $500,000
Mar. $475,000 June $400,000
20% of sales are collected in the month of the sale, 75% are collected in the month
following the sale, and 5% are written off as uncollectible. Cost of goods sold is 80% of
sales. Purchases are made the month prior to the sales 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 $35,000/month. The company’s cash balance as of February 1,
2010 will be $30,000. Excess cash will be used to retire short-term borrowing (if any). LPD
has no short term borrowing as of February 28, 2010. Assume that the interest rate on short-
term borrowing is 1% per month. The company must have a minimum cash balance of
$20,000 at the beginning of each month.
86. What is LPD’s projected total disbursements for April?
87. The cash budget consists of all the following factors EXCEPT:
a. cash disbursements
b. cash receipts
c. new financing needed
d. net income
88. What is the primary tool for short-term financial forecasting?
a. pro forma balance sheet
b. pro forma cash budget
c. capital budgeting
d. pro forma income statement
89. A firm’s cash position would most likely be hurt by:
a. decreasing excess inventory
b. retiring outstanding debt
c. establishing stricter (shorter) credit terms
d. increasing the net profit margin
90. A company that increases its liquidity by holding more cash and marketable securities is:
a. likely to achieve a higher return on equity because of higher interest income
b. going to maximize firm value because risk is decreased
c. likely to achieve a lower return on equity because of the smaller rates of return earned
on cash and marketable securities compared to the firm’s other investments
d. going to have to sell common stock to raise the cash to become more liquid
91. Which of the following actions would improve a firm’s liquidity?
a. buying machinery with long-term debt
b. purchasing inventories for cash
c. purchasing inventory with long-term debt
d. purchasing inventory on trade credit
92. According to the hedging principle, fixed assets should NOT be financed with:
a. permanent plus spontaneous financing
b. equity financing
c. permanent financing
d. temporary financing
93. Accrued wages and accrued taxes are considered to be:
a. spontaneous sources of unsecured short-term financing
b. current assets
c. permanent sources of financing because companies must always pay wages and taxes
d. secured sources of short-term financing
94. Spontaneous sources of financing include:
a. marketable securities
b. accounts receivable
c. common stock
d. wages payable
95. Permanent sources of financing include all but:
a. corporate bonds
b. commercial paper
c. preferred stock
d. common stock
96. All of the following are likely to increase the cost of a company’s short-term financing
a. an increase in the company’s debt rating by Moody’s or Standard and Poors
b. taking a loan on a discount basis
c. an increase in the compensating balance required
d. an increase in the bank’s prime lending rate
97. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of
credit with a bank that allows the company to borrow funds with an 8% interest rate subject
to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit
with the bank and will need the loan to cover the compensating balance as well as their
other financing needs. How much will Brown Inc. need to borrow?
98. All of the following are potential advantages of commercial paper EXCEPT:
a. flexible repayment terms.
b. ability to borrow very large amounts.
c. lower interest rates than comparable sources of short-term financing.
d. no compensating balance requirements.
99. An inventory loan agreement in which the inventories pledged as collateral are physically
separated from the firm’s other inventory and placed under the control of a third-party is
a. floating lien agreement
b. field warehouse agreement
c. securitized inventory loan arrangement
d. chattel mortgage agreement
100. Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to
$800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a
compensating balance of 18 percent of any amount borrowed on deposit at the bank.
Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the
effective annual cost of credit?