Exam 14: Working Capital and Management of Current Assets

The net effect of changes in the cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting the firm's investment in accounts receivable.

An increase in current assets increases net working capital, thereby reducing the risk of technical insolvency.

The__________ is a technique that divides inventory into three groups, according to dollar investment.

A firm has a cash conversion cycle of 60 days and average collection period of 40 days. The firm'soperating cycle is__________ days.

When implementing cash management strategies, a firm should take care to avoid having a large number of inventory stock-outs, to avoid losing the use of its cash by collecting its accounts receivable using high-pressure collection techniques, and to avoid damaging the firm's credit rating by overstretching accounts payable.

Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. -What is the net result of implementing the proposed plan?

The ABC system is an inventory management technique for determining the optimal order quantity for an item of inventory.

A technique that provides the analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called

With the ACH (automated clearing house) credits, disbursement float is sacrificed because ACHtransactions immediately draw down the company's payroll account on pay day.

The reorder point is the point at which the firm receives orders.

Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. -What is the firm's additional profit contribution from sales under the proposed relaxation of credit standards?

The conservative strategy is less profitable than the aggressive approach because it requires thefirm to pay interest on unneeded funds.

Operating cycle is the amount of time the firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.

In the EOQ model,___________ costs are the variable costs per unit of holding an item of inventory for a specified time period.

Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. -What is the cost of the marginal cash discount?

Irish Air Services has determined several factors relative to its asset and financing mix. A. The firm earns 10 percent annually on its current assets. B. The firm earns 20 percent annually on its fixed assets. C. The firm pays 13 percent annually on current liabilities. D. The firm pays 17 percent annually on longterm funds. E. The firm's monthly current, fixed and total asset requirements for the previous year are summarized in the table below: Month Current Assets Fixed Assets Total Assets January \ 45,000 \ 100,000 \ 145,000 February 40,000 100,000 140,000 March 50,000 100,000 150,000 April 55,000 100,000 155,000 May 60,000 100,000 160,000 June 75,000 100,000 175,000 July 75,000 100,000 175,000 August 75,000 100,000 175,000 September 60,000 100,000 160,000 October 55,000 100,000 155,000 November 50,000 100,000 150,000 December 50,000 100,000 150,000 -The firm's annual financing costs of conservative financing strategy is__________

The most stringent step in the collection process is

Assuming that the firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the "float" existing in the collection and payment systems.

A negative cash conversion cycle

The philosophy of the__________is that the firm would have only work-in-process inventory.