Exam 15: Working Capital and Current Assets Management

Table 15.5 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. (Assume a 360-day year) -What is the cost of marginal bad debts under the proposed plan? (See Table 15.5)

In theory, the conservative financing strategy ignores ________.

Working capital refers to a firm's long-term capital.

The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow.

A popular extension of materials requirement planning is inventory integration automation II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system.

The philosophy of the ________ is that a firm would have only work-in-process inventory.

________ float is the time that elapses between the deposit of a check by the payee and the actual availability of funds.

Disbursement float is experienced by a payee and is a delay in the actual withdrawal of funds.

Table 15.7 Fizzy 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, 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. (Assume a 360-day year.) -What is the cost of marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Table 15.4 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. -Inventory items that belong in the C category include ________. (See Table 15.4)

Sound cash management techniques would support ________.

Ashley's Ad Agency's accounts receivable totaled $451,000 on January 30, 2015. An aging summary of receivables at this date follows: The firm extends 30-day credit terms to all its credit customers. (a) Prepare an aging schedule for Ashley's Ad Agency. (b) Evaluate the firm's collection performance.

Table 15.1 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 long-term funds. (e) The firm's monthly current, fixed, and total asset requirements for the previous year are summarized in the table below: -If the firm's current liabilities in December were $40,000, the net working capital was ________. (See Table 15.1)

If a firm's sales are constant, its investment in operating assets should also be constant, and the firm will have only a permanent funding requirement.

A positive cash conversion cycle means that a firm must obtain financing to support the cash conversion cycle.

When current assets exceed current liabilities, a firm has negative net working capital.

In the ABC system of inventory management, the ________ method or system is appropriate for managing B items.

The ACH (automated clearing house) debits are preauthorized electronic withdrawals from a payer's account.

In the EOQ model, the total cost is minimized at the point where the order costs and carrying costs are equal.

________ are not obligations of the U.S. government, but most purchasers feel that they are implicitly guaranteed by the federal government.