Exam 16: Working Capital

Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days.It does not take discounts, and it typically pays on time, 50 days after the invoice date.Net purchases amount to $450,000 per year.On average, what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

lockbox plan is

concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

working capital is defined as current assets divided by current liabilities.

Which of the following statements concerning the cash budget is CORRECT?

maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.

Romano Inc.has the following data.What is the firm's cash conversion cycle?

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

longer its customers normally hold inventory, the longer the credit period supplier firms normally offer.Still, suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Other things held constant, if a firm "stretches"

overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

a firm takes actions that reduce its days sales outstanding

the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Atlanta Cement, Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following actions would be likely to shorten the cash conversion cycle?

facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.