Exam 15: Working Capital and Current Assets Management

An aging schedule breaks down accounts receivable into groups on the basis of the first letter of the name of the company that owes on the account.

Zero-balance accounts are checking accounts in which a zero balance is maintained and the bank automatically covers all checks presented against the accounts.

As credit standards are relaxed, sales are expected to ________ and the investment in accounts receivable is expected to ________.

Net working capital can be defined as the portion of a firm's current assets financed with long-term funds.

Only a firm's permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive funding strategy.

Table 15.7 Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.) -What is the cost of the marginal cash discount? (See Table 15.7)

A firm with a cash conversion cycle of 175 days wants to stretch its average payment period from 30 days to 45 days. This will result in a(n) ________ in the cash conversion cycle of ________ days.

Collection float is experienced by a payer and is a delay in the receipt of funds.

A firm with a very low current ratio in comparison to the industry standard could lower the risk of unavailable short-term funds by moving toward ________ financing strategy.

The ________ is an inventory management technique that minimizes inventory investment by having materials inputs arrive at exactly the time they are needed for production.

A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by 3 days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its financing. (Assume a 360-day year.) (a) Calculate the cash conversion cycle before and after the lockbox system. (b) Calculate the savings in financing costs from the lockbox system.

Other factors remaining constant, a decrease in the average age of inventory will result in ________.

The key dimension of credit selection which analyzes an applicant's record of meeting past obligations is ________.

In EOQ model, the average inventory is defined as the order quantity divided by 2.

Table 15.5 Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. (Assume a 360-day year) -What is the cost of marginal investments in accounts receivable under the proposed plan? (See Table 15.5)

Which of the following is true of a repurchase agreement?

Table 15.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2014 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 15.6)

A firm is said to be insolvent when its total assets is less than its total liabilities and stockholders' equity.

A popular extension of materials requirement planning is manufacturing resource planning II, which integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing using a sophisticated computer system.

One way to improve the cash conversion cycle is to ________.