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Exam 18: Current Asset Management

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Question 41

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Suppose a firm changes its credit policy from 2/10,net 30,to 3/10,net 30.The change is meant to meet competition,so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.

A) True
B) False

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Question 42

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Which firms benefit most from a lockbox plan?

A) those with widely disbursed manufacturing facilities
B) those that have a large marketable securities portfolio and cash to protect
C) those that hold inventories at many different sites
D) those that have customers who operate in many different parts of the country

E) B) and C)
F) B) and D)

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Question 43

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Net operating working capital,defined as current assets minus current liabilities,is also equal to the current ratio.

BC PrintsBC Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the DSO is 60 days, and the bad debt loss percentage is 5%. Also, BC Prints' cost of capital is 15%, and its variable costs total 60% of sales. Since BC Prints wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 and that 50% of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4%. -Refer to Scenario: BC Prints.What are the incremental pre-tax profits from this proposal?

A firm's investment in accounts receivable is largely influenced by production process and the requirements imposed by competition.

A JIT system is designed to stretch accounts payable as long as possible.

Which best describes the benefits of a lockbox system?

For a non-growth firm,it is possible to increase the percentage of sales that are made on credit sales and still keep accounts receivable at their current level,provided the firm can shorten the length of its collection period sufficiently.

If sales are seasonal,the DSO will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.

Which of the following is true of the EOQ model? Note that the optimal order quantity,Q,will be called EOQ.

Which of the following statements is correct?

A firm on average collects cheques totalling $250,000 per day.It takes the firm approximately 4 days to convert the cheques into usable cash.Assume (1) a lockbox system could be employed that would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs only $25,000 annually.

Fullerton Wine Company is a retailer that sells vintage wines.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy?​Ordering cost = $10 per orderCarrying cost = 20% of purchase pricePurchase price = $10 per unitTotal sales for year = 1,000 unitsSafety stock = 0

Which circumstance is NOT consistent with efficient inventory management?

Providing much higher yields than operating assets,marketable securities are often held in sizable amounts.

Depreciation and obsolescence are inventory carrying costs.

When sales rise,inventory as a percentage of sales may also increase,even with a computerized inventory control.

AberwaldAberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.) -Refer to Scenario: Aberwald.Assume that Aberwald holds a safety stock equal to a 30-day supply of chips.What is the maximum amount of inventory that Aberwald will have on hand at any time,i.e.,what will be the inventory level right after a delivery is made?

Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys tablets in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.) ​

Which best describes the cash position of a typical Canadian company?