Exam 16: Working Capital Management

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc,which is 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?

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

Suppose the credit terms offered to your firm by its suppliers are 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?

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 receipts are concentrated at the beginning of each month.

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Long-term loan agreements always contain provisions,or covenants,that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

Ingram Office Supplies,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.)

Which of the following statements is NOT CORRECT?

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Which of the following items should a company report directly in its monthly cash budget?

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

Data on Shin Inc for last year are shown below,along with the inventory conversion period (ICP)of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done,by how much would inventories decline? Use a 365-day year.

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

Changes in a firm's collection policy can affect sales,working capital,and profits.

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Which of the following statements is NOT CORRECT?

Romano Inc.has the following data.What is the firm's cash conversion cycle?

If a firm buys on terms of 2/10,net 30,it should pay as early as possible during the discount period to lower its cost of trade credit.

Which of the following is NOT commonly regarded as being a credit policy variable?