Exam 14: Working Capital and Management of Current Assets

Collection float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts.

Increasing the length of the credit period should increase sales, but both the investment in accounts receivable and bad debt expenses are likely to increase as well.

Flum Packages, Inc. Assets Liabilities \& Equity Current assets \ 10,000 Current Liabilities \ 5,000 Fixed assets 20,000 Long-term debt 12,000 Equity 13,000 ---- --- Total \3 0,000 Total \3 0,000 -The firm's initial net working capital is____________

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 profits on total assets for the previous year was___________

Net working capital can be defined as the portion of the firm's current assets financed with long-term funds.

_________involves the strategic use of mailing points and bank accounts to lengthen mail and clearing floats.

A firm may have a negative cash conversion cycle if it

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.

The General Chemical Company uses 150,000 gallons of hydrochloric acid per month. The cost of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a constant rate throughout the year. It takes 18 days to receive an order once it is placed. The reorder point is

A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 follows, on the basis of the month in which the credit sale was initially made. The firm extends 30-day credit terms. Month of Accounts Credit Sale Receivable June, 2003 \ 410,000 May, 2003 340,000 April, 2003 270,000 March, 2003 200,000 February, 2003 or before 100,000 Total \1 ,320,000 -Accounts receivable over 90 days total___________

FIGURE 14.2 Flum Packages, Inc. Assets Liabilities \& Equity Current assets \ 10,000 Current Liabilities \ 5,000 Fixed assets 20,000 Long-term debt 12,000 Equity 13,000 ---- --- Total \3 0,000 Total \3 0,000 -The firm's initial annual profits on total assets is___________

__________is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process.