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CHAPTER 18 SHORT-TERM FINANCE AND PLANNING Answers to Concepts Review and Critical Thinking Questions 1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus, such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a relatively long time to pay. 2. These are firms that have a relatively long time between the time purchased inventory is paid for and the time that inventory is sold and payment received. Thus, these are firms that have relatively short payables periods and/or relatively long receivable cycles. 3. a. Use: The cash balance declined by $200 to pay the dividend. b. Source: The cash balance increased by $500, assuming the goods bought on payables credit were sold for cash. c. Use: The cash balance declined by $900 to pay for the fixed assets. d. Use: The cash balance declined by $625 to pay for the higher level of inventory. e. Use: The cash balance declined by $1,200 to pay for the redemption of debt. 4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will probably increase depending on how close the suppliers are and how well they can estimate need. The operating cycle will decrease because the inventory period is decreased. 5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible for the cash cycle to be longer than the operating cycle if the accounts payable period is positive. Moreover, it is unlikely that the accounts payable period would ever be negative since that implies the firm pays its bills before they are incurred. 6. It lengthened its payables period, thereby shortening its cash cycle. It will have no effect on the operating cycle. 7. The supplier’s receivables period will increase, thereby increasing their operating and cash cycles. 8. It is sometimes argued that large firms take advantage of smaller firms by threatening to take their business elsewhere. However, considering a move to another supplier to get better terms is the nature of competitive free enterprise. 9. They would like to! The payables period is a subject of much negotiation, and it is one aspect of the price a firm pays its suppliers. A firm will generally negotiate the best possible combination of
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payables period and price. Typically, suppliers provide strong financial incentives for rapid payment. This issue is discussed in detail in a later chapter on credit policy. 10. BlueSky will need less financing because it is essentially borrowing more from its suppliers. Among other things, BlueSky will likely need less short-term borrowing from other sources, so it will save on interest expense. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.
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