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Budget Emergency and Debt Cycle

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I need help discussing and responding to two articles attached:
1. Refers to the article: "YES, MR ABBOTT, THERE IS A BUDGET EMERGENCY" (attached). What is a "budget emergency"? Discuss the reasons why Australia has a "budget emergency".

2. Refers to the 'Household debt locks Danes into vicious circle of decline' (attached). It described the Danish economy as being locked in a "vicious cycle of decline" due to household and government debts. What is a "vicious cycle of decline"? Why did Denmark experience this problem?

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1. There is a budgetary emergency because the budget of Australia cannot be brought under control. The growth in total government spending beyond the budget period is estimated to be 3.5 percent more than inflation. The economic growth will remain below 3 percent leading to a situation that the government will consume an increasing share of the economy. If the coalition keeps the tax no more than 23.7 percent of GDP, then the budget will never return to surplus.

There are several reasons for the budgetary emergency. There is $1.7 trillion of government spending that is the main cause of this emergency. The government is seeking to increase economic growth but there is no action to reduce costs. The largest areas of government spending are ...

Solution Summary

The answer to this problem explains the problem of debt cycle and budget emergency. The references related to the answer are also included.

See Also This Related BrainMass Solution

Multiple Choice Questions on Working Capital: operating cycle, cash cycle, credit terms, accounts receivable period, accounts payable period, short-term financial policy, accounts receivable turnover, days in receivables, disbursements, net cash flow

Question 1
1. Which of the following statements is true?
b. Cash is decreased when new debt is issued to purchase holiday merchandise.
a. Accepting the credit offered by a supplier is a source of cash.
c. Increasing the use of trade credit offered by a supplier is a use of cash.
d. Collecting an accounts receivable is a use of cash.

Question 2
2. Which one of the following will increase the operating cycle?
e. increasing the inventory period
c. decreasing the cash cycle
b. decreasing the accounts payable period
a. increasing the accounts payable period
d. increasing the accounts receivable turnover rate

Question 3
3. Which one of the following actions should a manager take if he or she wants to decrease the operating cycle?
d. decrease the period of time for which credit is granted to customers
c. decrease the rate at which the average inventory is sold
a. delay payments to suppliers to decrease the cash cycle
b. increase the inventory level while maintaining constant sales
e. purchase all inventory with cash

Question 4
4. All else equal, which one of the following will decrease the cash cycle?
c. increasing the operating cycle
e. decreasing the accounts receivable turnover rate
d. decreasing the accounts payable period
b. increasing the inventory turnover rate
a. increasing the credit period granted to a customer

Question 5
5. Which one of the following credit terms is most apt to produce the shortest accounts receivable period?
b. net 10
c. 2/10, net 30
a. net 45
e. 2/20, net 45
d. 3/5, net 10

Question 6
6. Baker Industries offers credit terms of 2/20, net 60 to Charlie Co. Charlie Co. has an inventory period of 15 days and an operating cycle of 45 days. Given this, which of the following statements are correct? (I. The credit terms of Baker Industries are too restrictive; II. If Charlie Co. forgoes the discount on its purchases, it will have a negative cash cycle; III. Baker Industries is financing the accounts receivable of Charlie Co; IV. If Charlie Co. is delinquent in its payment, Baker Industries should be concerned)
b. III and IV only
a. I and II only
d. I, III, and IV only
c. II, III, and IV only
e. I, II, III, and IV

Question 7
7. Which one of the following statements is correct concerning the accounts payable period?
c. Managers generally prefer a shorter accounts payable period than a longer one.
a. The accounts payable period is equal to the cost of goods sold divided by the average accounts payable.
d. Extending the accounts payable period effectively decreases the cash needs of a firm.
e. Increasing the accounts payable turnover rate increases the accounts payable period.
b. An increase in the accounts payable period will increase the operating cycle, all else equal.

Question 8
8. A flexible short-term financial policy:
b. tends to cause more production interruptions than does a restrictive policy due to inventory shortages.
d. tends to lower the selling prices that can be charged versus the prices under a restrictive policy.
c. lowers the costs of maintaining current assets.
e. tends to indicate that the carrying costs of a firm are relatively high as compared to the shortage costs.
a. tends to increase the cash inflows of a firm in the future more so than a restrictive policy does.

Question 9
9. A firm which adopts a compromise short-term financial policy:
a. borrows sufficient long-term money so that short-term financing can be avoided.
c. relies primarily on short-term debt to meet all of its financing needs.
d. will sometimes have cash surpluses and sometimes have cash shortfalls.
b. finances its long-term assets with a combination of short-term and long-term debt.
e. will maintain a constant level of long-term debt as the firm increases in size.

Question 10
10. A negative net cash inflow on a cash budget indicates that a firm:
a. has cash outflows other than those related to accounts payable.
d. is facing bankruptcy.
e. has projected cash disbursements that exceed the projected cash collections.
c. has funds available for short-term investing.
b. utilizes both short and long-term debt.

Question 11
11. Nelson's Mulch has the following current account values for the year.

Account Beginning Balance Ending Balance

Accounts receivable $1,300 $1,450

Inventory 2,100 1,900

Accounts payable 1,500 1,250

These accounts represent a net _____ of cash for the year of:

e. use; $250.
a. source; $100.
b. source; $150.
d. use; $200.
c. use; $100.

Question 12
12. Wayne's Wells has sales for the year of $48,900 and an average inventory of $8,800. The cost of goods sold is equal to 60 percent of sales and the profit margin is 5 percent. How many days on average does it take the firm to sell an inventory item?
a. 95 days
e. 109 days
d. 104 days
b. 99 days
c. 101 days

Question 13
13. The accounts receivable turnover rate for the Bedford Bedding Co. has gone from an average of 6.7 times to 7.2 times per year. The days in receivables has:
a. decreased by 7 days.
b. decreased by 4 days.
e. increased by 7 days.
d. increased by 5 days.
c. increased by 4 days.

Question 14
14. The Winters Co. has annual sales of $918,700. Cost of goods sold is equal to 55 percent of sales. The firm has an average accounts payable balance of $72,400. How many days on average does it take The Winters Co. to pay its suppliers?
c. 38 days
d. 46 days
e. 52 days
b. 34 days
a. 29 days

Question 15
15. The Sun Lee Co. has a receivables turnover rate of 11.5, a payables turnover rate of 9.8, and an inventory turnover rate of 13.6. What is the length of the firm's operating cycle?
c. 37 days
a. 15 days
b. 22 days
d. 59 days
e. 67 days

Question 16
16. Robert's International currently has an inventory turnover of 15, a receivables turnover of 18, and a payables turnover of 10. How many days are in the cash cycle?
a. 8 days
c. 45 days
e. 81 days
b. 22 days
d. 74 days

Question 17
17. Die Cast, Inc., has these projected sales estimates:

April May June July

Sales $1,200 $1,300 $1,700 $1,900

The company collects 15 percent of its sales in the month of sale, 70 percent in the following month, and another 12 percent in the second month following the month of sale. Die Cast never collects 3 percent of its sales. What is the amount of the June collections?

b. $1,406
c. $1,423
e. $1,631
d. $1,447
a. $1,309

Question 18
18. The Thomas-Davis Co. has the following estimated sales:

Q1 Q2 Q3 Q4

Sales $3,800 $3,300 $2,800 $4,400

Purchases are equal to 67 percent of the following quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume that there are 30 days in each month. Thomas-Davis will purchase _____ of goods in quarter 3 and pay their suppliers _____ during quarter 3.

a. $1,876; $2,099
b. $1,876; $2,233
d. $2,948; $2099
c. $2,948; $1,876
e. $2,948; $2,233

Question 19
19. The Co-Co Co. purchases are equal to 55 percent of the following month's sales. The accounts payable period for the purchases is 60 days while all other expenditures are paid in the month during which they are incurred. Assume that each month has 30 days. The company has compiled this information:

April May June July

Sales $4,500 $5,200 $5,700 $6,100

Payroll expenses 400 500 550 575

Rent and other expenses 900 940 980 1,020

Taxes and insurance 2,500 100 2,500 0

What is the total amount of Co-Co's disbursements for the month of June?

d. $7,165
c. $6,890
b. $5,352
a. $4,360
e. $8,048

Question 20
20. The Complete Co. has projected their first quarter sales at $7,500, second quarter sales at $8,000, and third quarter sales at $8,400. The firm's cost of goods sold is equal to 55 percent of the next quarter's sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. At the beginning of the first quarter, the firm has an accounts receivable balance of $3,600 and an accounts payable balance of $2,750. The firm pays $1,200 a month in cash expenses and $200 a month in taxes. At the beginning of the first quarter, the cash balance is $300 and the short-term loan balance is zero. During the first quarter, the firm is planning on spending $2,500 for some new equipment. The firm maintains a minimum cash balance of $25. Assume that each month has 30 days. The net cash flow for the first quarter is _____ and the cumulative cash surplus (deficit) at the end of the first quarter, prior to any short-term borrowing, is:
b. -$767; -$492.
a. -$767; -$518.
c. -$767; -$467.
d. $1,733; -$518.
e. $1,733; -$492.

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