Question

Case in Discussion Extensive Enterprise’s management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company’s management expects that it will take 60 days to manufacture and sell its products and 50 days to receive payment from its customers. Extensive’s CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 110 days. Which of the following responses to the CFO’s statement is most accurate?

a. The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them.
b. The CFO can reduce the estimated length of the bank loan by this amount of time.
c. The CFO’s approximation of the length of the bank loans should be accurate, because it will take 110 days for the company to manufacture, sell, and collect cash for its goods.
d. All these things must occur for the company to be able to repay its loans from the bank.

Answer 1

(D)

Step-by-step explanation:

Which of the listed responses to the CFO's statement is the most accurate?

(D) All these things must occur for the company to be able to repay its loans obtained from the bank.

This is the main point that the CFO attempted to pass across. The company's management should maximize the 60 days for manufacturing and sales of its products and the 50 days to receive payment from its customers; because the bank loans should be paid in exactly 110 days.