Exam 14: Working Capital and Management of Current Assets

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by

If the firm's credit period is increased, the sales volume can be expected to ___________ , the investment in accounts receivable can be expected to __________, and the bad debt expenses can be expected to__________.

Credit analysts usually analyze an applicant's creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions.

In EOQ model, the average inventory is defined as the order quantity divided by 2.

A firm with highly unpredictable sales revenue would best choose ____________financing strategy to minimize risk.

The goal of working capital management is to

Because managing inventory is just like managing any other investment, decisions about the level of inventory should be guided by the effect of inventory levels on sales.

The basic components of collection float include all of the following EXCEPT____________float.

When a firm initiates or increases a cash discount, sales are expected to____________ , the investment inaccounts receivable is expected to _____________, the bad debt expense is expected to____________ , and theprofit per unit is expected to____________ .

Bowring Ball Bearings has 10 different items in its inventory. The average number of units held in inventory and the average unit cost are listed for each item. The firm uses an ABC system of inventory control. Average Number of Units Average Unit Cost 1 5,000 \ 0.05 2 2,000 1.50 3 100 8.50 4 500 45.00 5 650 3.50 6 10,000 100.00 7 5,100 0.25 8 3,100 5.00 9 20 .75 10 1,150 2.00 -Inventory items that belong in the C category include________

2/15 net 45 translates as 2 percent of the balance is due in 15 days; the remaining balance is due in45 days.

Short-term financial management is concerned with management of the firm's current assets and current liabilities.

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 are the savings of marginal bad debts under the proposed plan? (See Figure 14.6)

The firm's credit standards are the minimum requirements for extending credit to a customer.

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 cost of marginal bad debts under the proposed plan? (See Figure 14.4)

A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Its operating cycle is ___________ days.

The effect of a decrease in the ratio of current assets to total assets and the effect of an increase in the ratio of current liabilities to total assets are increases in the firm's profits and, correspondingly, its risk.

The major external sources of credit information are all of the following EXCEPT

One aspect of risk associated with the aggressive strategy's maximum use of short-term financing is the fact that changing short-term interest rates can result in significantly higher borrowing costs as the short-term debt is refinanced.

When a firm decreases or cancels a cash discount, sales are expected to___________ _, the investment inaccounts receivable is expected to _, the bad debt expense is expected to___________ , and theprofit per unit is expected to___________ .