Exam 16: Supply Chains and Working Capital Management

Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.Thus,if the depreciation charge for the coming year doubled or halved,this would have no effect on the cash budget.

For a zero-growth firm,it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level,provided the firm can shorten the length of its collection period sufficiently.

Fireside Inc.has the following data.What is the firm's cash conversion cycle? Inventory conversion period = $\quad$ $\quad$ $\quad$ 38 days Average collection period $=$$\quad$ $\quad$ $\quad$ 19 days Payables deferral period = $\quad$ $\quad$ $\quad$ $\quad$ 20 days

As 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.

Which of the following statements is CORRECT?

Famous Farm's payables deferral period (PDP)is 50 days (on a 365-day basis),accounts payable are $100 million,and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

Which of the following statements is CORRECT?

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

A firm's collection policy,i.e.,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

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?

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30.The change is meant to meet competition,so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Other things held constant,if a firm "stretches" (i.e.,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Which of the following statements is CORRECT?

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: From this data we may conclude that

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Whaley & Whaley has the following data.What is the firm's cash conversion cycle? Inventory conversion period = $\quad$ $\quad$ $\quad$ 41 days Average collection period $=$$\quad$ $\quad$ $\quad$ 31 day Payables deferral period = $\quad$ $\quad$ $\quad$ $\quad$ 38 days

Fontana Painting had the following data for the most recent year (in millions).The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold.Fontana finances its net working capital with a bank loan at an 8% annual interest rate,and it uses a 365-day year.If these changes had been made,by how much would the firm's pre-tax income have increased?

A lockbox plan is most beneficial to firms that