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Exam 18: Current Asset Management

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Question 21

True/False

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Outsourcing is a practice of selling a significant percentage of intermediate components to outside suppliers from the in-house productions.

A) True
B) False

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Question 22

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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.If Aberwald holds a safety stock equal to a 30-day supply of chips,what is its average inventory level?

A) 3,175
B) 12,088
C) 13,675
D) 15,750

E) A) and B)
F) None of the above

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Question 23

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The target cash balance should be set so that it need not be adjusted for either seasonal patterns or unanticipated fluctuations,although it should be adjusted to reflect long-term changes in the firm's operations.

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 would be the incremental bad debt losses if the change were made?

Which statement best describes DSO and aging?

Two methods for improving the collection process are the use of a lockbox system and moving funds by electronic transfer.

Which best describes why firms hold cash balances?

Canada CorpAssume that Canada Corp has sales of 5,000,000 gallons per year. Further, assume that Canada Corp can order the material at a cost of $160 per order, plus fixed ordering costs of $75 per order. The firm's carrying cost is 25% of the inventory value, at cost. -Refer to Scenario: Canada Corp.What is Canada Corp.'s EOQ?

Decisions on granting credit,or changing credit or collection policies,involve an analysis of the magnitude and timing of the cash flow and the risks and returns expected.This evaluation is done with a net present value framework.

Which statement best describes receivables management?

Fogel's Pumps offers its customers credit terms of 2/10,net 30,while Larry's Pumps offers terms of 2/10,net 45 days.The aging schedules for the two companies' receivables are shown below:Which company has the higher percentage of overdue accounts,and what is its percentage of overdue accounts? $\begin{array}{lllll}\text { Age of } &{\text { Fogel's }} &{\text { Larry's }} \\\hline \text { Account(Days) } & \text { Value of Account } & \begin{array}{l}\text { Percentage of } \\\text { Total Value }\end{array} & \text { Value of Account } & \begin{array}{l}\text { Percentage of } \\\text { Total Value }\end{array} \\\hline 0-10 & \$ 58,800 & 60 \% & \$ 73,500 & 50 \% \\11-30 & 19,600 & 20 & 29,400 & 20 \\31-45 & 14,700 & 15 & 29,400 & 20 \\46-60 & 2,940 & 3 & 10,290 & 7 \\\text { Over } 60 & 1,960 & 2 & 4,410 & 3 \\\text { Total receivables } & \$ 98,000 & 100 \% & \$ 147,000 & 100 \%\end{array}$

Because money has time value,cash sales are always more profitable than credit sales.

You receive some goods on April 1 with the following terms: 3/20,net 30,June 1 dating.This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

The average collection period is calculated by dividing total sales by accounts receivable.It is an effective measure for internal use in monitoring a firm's collections.

A firm's collection policy,i.e.,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

Which of the following statements is NOT correct?

Which circumstance would cause average inventory holdings to decrease,other things held constant?

The credit period is the amount of time it takes to do a credit search on a potential customer.

Which of the following has to do with inventory management?

Bello Inc.had sales of $2,500,000 per year (all credit) ,and its DSO was 35 days.What was its average amount of accounts receivable outstanding,based on a 365-day year?