Identifying Borrowing Causes Knowledge Checks + Post-Test

If you are talking to a customer who is explaining that her company is experiencing sales growth and the business needs a loan, which is the most likely underlying cause of the cash shortage?

Sales growth usually causes accounts receivable and inventory to grow as well. (When sales grow, accounts receivable and inventory usually increase proportionately in order to support the higher level of sales. This creates a need for more cash, which is sometimes met through borrowing. Operating expenses may also grow as a result of sales growth, but this is not necessarily always the case.

What are trading assets?

Many lends refer to accounts receivable and inventory together as trading assets, because they are involved in the operating (trading_ cycle of a company’s business

What is the impact of sales growth on Brook Plumbing’s borrowing needs?

(Determine whether sales growth is a borrowing cause.)

X-The business has long-term sales growth, which is a potential borrowing cause, but it has no seasonal sales peak.

What effect did the change in the inventory days on hand in 20Y3 have on Revolutionary Designs’ financing needs? (Round your days on hand calculation to two decimal places.)

(Calculate the impact of a change in inventory days on hand (INVDOH) on a business’s financing need._

X-Financing needs decreased by approximately $296,000.

Use the information below to answer the following question.

	20Y1	20Y2	20Y3
Net profit after taxes	$350	$570	$710
Cash dividends	$75	$180	$260

What is the correct conclusion to draw from the trend in the dividend payout ratio?

(Identify excessive distribution to owners as a borrowing cause that a business may encounter.)

X-The dividend payout ratio is shrinking, which means the business will most likely need to borrow less.

Directions: Use the information below to answer the following question.   20Y1 20Y2 20Y3 Sales $1,840,000 $1,920,000 $1,750,000 Net fixed assets $570,000 $620,000 $750,000 Sales / net fixed assets ratio  3.23  3.1  2.33 Assuming no revaluation of fixed assets has occurred, what is the correct conclusion to draw from this trend? (Determine whether a business is likely to need to replace or augment its fixed assets.

X The business will need additional financing to add fixed assets to support the rate of sales growth.

Last year a business purchased $860,000 of inventory from a supplier and paid at an average of 46 days. This year, the supplier has changed its terms to 30 days and, as a result, the business now pays at an average of 30 days. Assume total purchases remain the same. What effect will the change in supplier terms have on the business’s financing needs? (Use purchases in place of cost of goods sold in your calculation,)

(Calculate the impact of a change in accounts payable days on hand (APDOH) on a business’s financing need.)

X Financing needs will increase by approximately $70,700

Hydro Controls manufactures industrial valves and fittings used in a variety of underwater applications. Growth in oceanic oil and gas exploration has resulted in greater demand for the business’s products. While sales are generally increasing, there are no seasonal patterns. The owners have requested new financing to expand the production facilities and to support increasing inventory. What is the best type and term of credit to meet this borrowing need?

X-Explanation:Identify whether sales growth is seasonal or long term and select the appropriate type of financing.

Which business is LEAST likely to have a borrowing need?

(Identify unprofitable or marginally profitable operations as a borrowing cause a business may encounter.)

X-A business that has high profit margins, is growing slowly, and pays dividends.

What had the largest impact on the length of the operating cycle?

(Determine whether there has been a slowdown in the operating cycle and the nature of the slowdown.)

X-The change in INVDOH from 20Y2 to 20Y3.