Exam 16: Supply Chains and Working Capital Management

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Hinkle Corporation buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $550,000 per year.On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature.However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Data on Mertz Co.for the most recent year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done, by how much would payables increase? Use a 365-day year. Cost of goods sold = \ 75,000 Payables = \ 5,000 Payables deferral period (PDP) = 24.33 Benchmark payables deferral period = 30.00

For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

The 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.

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days.Assuming a 365-day year, what is the length of its cash conversion cycle?

Which of the following statements is CORRECT?

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

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

When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Marshall Inc.recently hired your consulting firm to improve the company's performance.It has been highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis, you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year, what is the firm's present cash conversion cycle? Average inventory = \ 75,000 Annual sales = \ 600,000 Annual cost of goods sold = \ 360,000 Average accounts receivable = \ 160,000 Average accounts payable = \ 25,000

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

The relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Albrecht Inc.is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000.If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Summary balance sheet data for Greener Gardens Co.is shown below (in thousands of dollars).The company is in a highly seasonal business, and the data show its assets and liabilities at peak and off-peak seasons: Cash Marketable securities Accounts receivable Inventories Net fixed assets Total assets Payables and accruals Short-term bank debt Long-term debt Common equity Total cliams Peak Off-Peak \ 50 \ 30 0 20 40 20 100 50 \ 690 \ 620 \ 30 \ 10 50 0 300 300 310 310 From this data we may conclude that

If a firm's suppliers stop offering cash discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.