Student Forums CMA Part 1 Section B: Planning, Budgeting and Forecasting B.6. Top-Level Planning and Analysis Question ID: HOCK CMA.P1A5.07 (Topic: Top-Level Planning and Analysis)

Question ID: HOCK CMA.P1A5.07 (Topic: Top-Level Planning and Analysis)

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    Topic
  • #237733
    Wenyan Yuan
    Participant

    I have a question about item II below: why would increasing time given to customers to pay increase requirements for external financing to increase? 

    To me, this looks like a trade off between cash and accounts receivable with no impact to asset. Why would there be a need to increase external financing, i.e. liability? Thank you!

     

    Which of the following events will cause a company’s requirements for external financing to increase?

    I.The dividend payout ratio increases.
    II.The company changes its credit terms, increasing the time it gives customers to pay.
    III.The company negotiates a lower price and longer terms with a major supplier.
    IV.The retention ratio increases.
    V.Increased competition forces the company to lower its prices.
    • A. I, II, and V.correct
    • B. III and IV.
    • C. II and V.
    • D. II, IV and V.
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  • #237734
    Lynn Roden
    HOCK international

    Hello Wenyan Yuan,

    If a company gives its customers more time to pay, they will take more time to pay. As a result, the company’s cash flow will slow down. The result will be decreased cash inflow, and the company may very well need to borrow some money in order to be able to pay its own bills.

    Lynn

    #237814
    Wenyan Yuan
    Participant

    Hi, Lynn, thanks for the reply. I get what you said. It just sounds more like a “it may happen” situation than a “it will happen” situation. 

    #237816
    Lynn Roden
    HOCK international

    Hello Wenyan Yuan,

    I think for planning purposes, we can expect that it will happen. The balance of accounts receivable will increase and additional financing will be necessary. Additional financing needs to be planned for, and that is what this question is about.

    Lynn

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