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Chapter26: Short-Term Finance and Planning

Concept Questions

  1. Operating Cycle What are some of the characteristics of a firm with a long operating cycle?

  2. Cash Cycle What are some of the characteristics of a firm with a long cash cycle?

  3. Sources and Uses For the year just ended, you have gathered the following information about the Holly Corporation:

    1. A $200 dividend was paid.

    2. Accounts payable increased by $500.

    3. Fixed asset purchases were $900.

    4. Inventories increased by $625.

    5. Long-term debt decreased by $1,200.

    Label each as a source or use of cash and describe its effect on the firm's cash balance.

  4. Cost of Current Assets Grohl Manufacturing, Inc., has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the company's carrying costs, shortage costs, and operating cycle.

  5. Operating and Cash Cycles Is it possible for a firm's cash cycle to be longer than its operating cycle? Explain why or why not.

  6. Shortage Costs What are the costs of shortages? Describe them.

  7. Reasons for Net Working Capital In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?

Use the following information to answer Questions 8–12: Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The increased payables period will be in effect for all of the company's 4,000 suppliers.

  1. Operating and Cash Cycles What impact did this change in payables policy have on BlueSky's operating cycle? Its cash cycle?

  2. Operating and Cash Cycles What impact did the announcement have on BlueSky's suppliers?

  3. Corporate Ethics Is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers?

  4. Payables Period Why don't all firms simply increase their payables periods to shorten their cash cycles?

  5. Payables Period BlueSky lengthened its payables period to “control costs and optimize cash flow.” Exactly what is the cash benefit to BlueSky from this change?

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