Question # 1 Question Tru e False Operating Cycle (OC) consists of that period of time measured by the Average Age of Inventory (AAI) and the Average Collection Period (ACP) of accounts receivable 10 Firms need to distinguish between permanent funding requirements, and seasonal funding requirements to properly manage sales Sales revenue is the first and most important variable to forecast when developing a financial plan Short-term financing is less expensive than long terrm funding for current assets Sales revenue is used to develop accounts payable days. The sustainable growth rate (SGR) tells us how much the firm can grow by using internally generated funds and keeping the liquidity and solvency ratios the same as the prior year As a firm's sales grow its accounts receivable and inventories will also grow if the firm's operating policies for these items remain constant at 30 days and 15 days respectively 12 13 14 15 16 ear-end #1. Sales 200 with Cash 100 long-term debt 100 + capital stock 100 + opening retained earnings 0+ net income 50 + accounts payable 100- accounts receivable 100 - inventory 50 fixed assets 100 Year-end #2: Sales 400 with Cash 100-+ long-term debt 200 + capital stock 100+opening retained earnings 50 + net income 50+ accounts payable 200-accounts receivable 100- inventory 100 fixed assets 300 The company pays dividends instead of investing cash in its business The situation in question 16 means the sales increase was not profitable because Cash remained the same in Year-end #2. The situation in question 16 indicates the firm's long-term debt to equity improved in the Year-end #2. The cash budget uses forecasts of cash inflows, outflows, and ending cash balances to predict loan needs and funds available for temporary investment. A required equity return multiple of 4 means that the investor wants a 25% return given the risk of the business 17 18 19 20