Exam 16: Supply Chains and Working Capital Management

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S.,and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million,and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000,what pre-tax net annual savings would be realized?

Which of the following statements is NOT CORRECT?

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Which of the following statements is NOT CORRECT?

If 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.

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

When deciding whether or not to take a trade 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.

Which of the following will cause an increase in net working capital,other things held constant?

Tierney Enterprises is constructing its cash budget.Its budgeted monthly sales are $5,000,and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount,while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments," which include wages,rent,and taxes,are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average net cash flow during the month.

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique.

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

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

The calculated cost of trade credit can be reduced by paying late.

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.

Baltimore Baking is preparing its cash budget and expects to have sales of $30,000 in January,$35,000 in February,and $35,000 in March.If 20% of sales are for cash,40% are credit sales paid in the month after the sale,and another 40% are credit sales paid 2 months after the sale,what are the expected cash receipts for March?

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1)when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health,and (2)long-term loan agreements are more complex.

Data on Nathan Enterprises for the most recent year are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year. Sales \ 110,000 Accounts receivable \ 16,000 Days sales outstanding (DSO) 53.09 Benchmark days sales outstanding (DSO) 20.00

Which of the following statements is CORRECT?

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.)