3FA3-CH18.docx

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Commerce 3FA3
Chapter 18: Short-Term Finance and Planning
Operating Cycle: The time period between the acquisition of inventory and when cash is
collected from receivables
Inventory period: The time it takes to acquire and sell inventory
Accounts receivable period: The time between sale of inventory and collection of the receivable
Accounts payable period: The time between the receipt of inventory and payment for it
Cash Cycle: The time between cash disbursement and cash collection
Cash flow time line: Graphical representation of the operating cycle and the cash cycle
Carrying costs: Costs that rise with increases in the level of investment in current assets
Shortage costs: Costs that fall with increases in the level of investment in current assets
Cash Budget: A forecast of cash receipts and disbursements for the next planning period
Operating Loan: Loan negotiated with banks for day-to-day operations
Letter of credit: A written statement by a bank that money will be paid, provided conditions
specified in the letter are met
Covenants: A promise by the firm, included in the debt contract, to perform certain acts. A
restrictive covenant imposes constraints on the firm to protect the interests of the debt holder
Accounts Receivable financing: A secured short-term loan that involves either the assignment
or factoring of receivables
Maturity Factoring: Short-term financing in which the factor purchases all of a firm’s receivables
and forwards the proceeds to the seller as soon as they are collected
Inventory loan: A secured short-term loan to purchase inventory
Trust receipt: An instrument acknowledging that the borrower holds certain goods in trust of the
lender
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