Exam 14: Working Capital and Management of Current Assets

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 net result of increasing the cash discount?

A firm has an operating cycle of 170 days, an average payment period of 50 days, and an average age of inventory of 145 days. The firm's average collection period is ___________ days.

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 marginal investment in accounts receivable under the proposed plan?

A firm expects to have funds of $150,000 idle for 60 days. If the firm could purchase marketable securities yielding 10 percent and pay brokerage fees of $1,500, the firm

The __________is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold.

The average investment in accounts receivable is equal to the firm's total variable cost of annual sales divided by its average collection period.

A major decision confronting the business firm when purchasing marketable securities involves a trade-off between the opportunity to earn a return on idle funds during the holding period and the brokerage costs associated with the purchase and sale of marketable securities.

A firm purchased raw materials on account and paid for them within 30 days. The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased. The customer paid for the finished good 60 days later. The firm's cash conversion cycle is___________ days.

In the economic order quantity model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to increase.

In the aggressive financing strategy, a firm anticipating a large increase in sales should finance the increase in working capital with

The ability to purchase production inputs on credit allows the firm to partially (or may be even totally) offset the length of time resources are tied up in the operating cycle.

An increase in the average collection period will result in___________in the operating cycle.

The basic strategies that should be employed by the business firm in managing cash include all of the following EXCEPT

The goal of a firm's cash management is to

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30days to 45 days. This will result in a(n)___________ in the cash conversion cycle of ____________ days.

If a firm increases its current assets relative to total assets,

The most important of the four C's of credit are

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a loan. The most likely consequence of this action is

The economic order quantity (EOQ) is the order quantity which minimizes the carrying costs per unit per period.

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 A category include