Exam 17: Cash,receivables,and Inventory Management

Crimson Plumbing Supplies expects total sales of $9,000,000 this year.Ten percent of the company's sales are paid in cash; credit sales are usually paid by check.The average check size is $3,000.Second National Bank is offering the company a lock-box system.The fees are $800 per month plus $.60 per check.Short-term marketable securities are currently earning 8 percent per year.What reduction in check collection time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off from adopting the proposed system? Use a 365-day year.

EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.

SteelCo Production,Inc.is considering the use of a lock-box collection system.SteelCo's average check receipt is $1,350.The company invests excess cash in money-market certificates and receives an average of 3.5% annual interest.The lock-box system will speed up SteelCo's collections by 2.5 days.What is the maximum per check processing cost that SteelCo should be willing to pay for the lock-box system?

Which of the following is NOT a motive for a corporation to hold cash balances?

In a lockbox system,customer payments are collected directly by the bank and deposited immediately in the corporation's account.

In the EOQ model the optimal ordering quantity is the quantity for which the sum of the costs of ordering and carrying inventory is minimized.

A company concerned about the liquidity of its near-cash securities should invest in U.S.Treasury bills because the secondary market for U.S.Treasury bills is excellent.

Banker's acceptances have the following characteristics EXCEPT

Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?

Marketable securities are only those security investments the firm can convert into cash balances within one year.

A local lamp store expects to sell 2000 lamps in the coming year.It costs the store $1.00 in carrying costs for each lamp and $10.00 for each order placed. a.What is the economic order quantity for the lamps? b.How many orders will be placed each year? c.If the store wants a one-week safety stock and it takes one week to receive an order after it has been placed,what should the inventory level be when a new order is placed? Assume a 50-week year.

Anticipatory buying occurs because of an anticipated decrease in interest rates.

If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30,the result would probably be

Float is best described by which of the below?

A textile manufacturer has cloth that has a $14 per yard carrying cost per year.This cloth is used at a rate of 25,000 yards per year,and ordering costs are $10 per order. a.What is the economic order quantity for this cloth? b.What are the annual inventory costs for this firm if it orders in this quantity?

The goal of cash management is to hold the minimum amount of cash necessary to meet the firm's obligations in a timely manner.

Premium Seed Sales,Inc.expects to generate sales of $22,000,000 in the coming year.All sales are done on a credit basis,net 45 days.Premium Seed has estimated that it takes an average of three days for payments to reach their central office and an additional two days to process the payments.What is the opportunity cost of the funds tied up in the mail and processing? Premium Seed uses a 360-day year in all calculations and can invest free funds at 6.5%.

Money-market funds

A negotiable certificate of deposit is a marketable receipt for funds deposited in a bank for a period of one to 18 months.

Assume that Federated Stores,whose credit card billings total $120 billion per year,were to implement a lockbox arrangement that would speed up the collection of its credit card billings by 2 full days.If Federated could earn 3.5% on its marketable securities,how much would the firm earn per year from such a lockbox arrangement? Assume a 365-day year.