Exam 15: Working Capital and Current Assets Management

If the level of bad debt attributable to credit policy is relatively constant, increasing collection expenditures can be expected to reduce bad debts.

Table 15.1 Irish Air Services has determined several factors relative to its asset and financing mix. (a) The firm earns 10 percent annually on its current assets. (b) The firm earns 20 percent annually on its fixed assets. (c) The firm pays 13 percent annually on current liabilities. (d) The firm pays 17 percent annually on long-term funds. (e) The firm's monthly current, fixed, and total asset requirements for the previous year are summarized in the table below: -If the firm's current liabilities in June were $37,000, the net working capital was ________. (See Table 15.1)

The first step in the collection of overdue accounts is ________.

Eurodollar deposits are deposits of currency that are not native to the country in which the bank is located.

Adam's Aeronautics is interested in making sure it has enough money to finance its assets. The company's current assets and fixed assets for the months of January through December are given in the following table. (a) Find the average monthly seasonal and permanent funds requirement. (b) What is the total cost of financing under the aggressive and conservative strategies. Assume short-term funds costs 4.5 percent and the interest rate for long-term funds is 12 percent. (c) Find the net working capital under the aggressive and conservative strategies.

Which of the following is true of credit scoring of suppliers?

The ________ is the time period that elapses from the point when a firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold.

In an aggressive financing strategy, a firm anticipating a large increase in sales for the coming period should finance the increase in working capital with ________.

The key dimension of credit selection which analyzes the amount of assets an applicant has available for use in securing the credit is ________.

A firm with highly unpredictable sales revenue would best choose ________ funding strategy to minimize risk.

Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer.

Table 15.3 -Ace's Business Forms pays 8 percent on short-term funds and 10 percent on long-term funds. Determine its annual financing costs using the trade-off strategy described: Ace's Business Forms has seasonal financing requirements ranging from zero to $50,000 per month. Based on this range, the firm has decided to finance $25,000 per month of the seasonal funds with long-term debt and the rest of the seasonal funds with short-term debt. The permanent funds requirement will be financed with long-term funds. (See Table 15.3)

Float is important in the cash conversion cycle of a firm because ________.

Assuming that a firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the "float" existing in the collection and payment systems.

Mail float is the delay between the deposit of a check by a payee and the actual availability of the funds.

Federal agency issues are obligations of the U.S. Treasury and are readily accepted as low-risk securities.

Processing float is the delay between the receipt of a check by a payee and its deposit in firm's account.

________ float is the delay between the receipt of a check and the actual deposit of it into a firm's account.

Nonmanufacturing firms are more likely to have positive cash conversion cycles; they generally carry smaller, faster-moving inventories and often sell their products for cash.

Adong's Fishing Products is analyzing the performance of its cash management. On average, the firm holds inventory for 65 days, pays its suppliers in 35 days, and collects its receivables in 15 days. The firm has a current annual outlay of $1,960,000 on operating cycle investments. Adong currently pays 10 percent for its financing. (Assume a 360-day year.) (a) Calculate the firm's cash conversion cycle. (b) Calculate the firm's operating cycle. (c) Calculate the daily expenditure and the firm's annual savings if the operating cycle is reduced by 15 days.