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.

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

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

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36,500,000,or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

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.

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

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.

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

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

Pascarella Inc.is revising its payables policy.It has annual sales of $50,735,000,an average inventory level of $15,012,000,and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However,it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle,assuming a 365-day year?

Taylor Textbooks 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.)

Net working capital,defined as current assets minus the sum of payables and accruals,is equal to the current ratio minus the quick ratio.

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.

If a firm takes actions that reduce its days sales outstanding (DSO),then,other things held constant,this will lengthen its cash conversion cycle (CCC).

Which of the following statements is CORRECT?

If a firm sells on terms of 2/10 net 30 days,and its DSO is 28 days,then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days.Your firm is not taking discounts,but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date,what is the effective annual percentage cost (not the nominal cost)of its costly trade credit,using a 365-day year?

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

Which of the following statements is CORRECT?

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.