Exam 15: Working Capital and Current Assets Management

Collection float results from the lapse between the time that a firm deducts a payment from its checking account ledger and the time that funds are actually withdrawn from its accounts.

A firm is analyzing a relaxation of credit standards that is expected to increase sales 10 percent. The firm is currently selling 400 units at an average sale price per unit of $575, and the variable cost per unit is $400 at the current sales volume. The average cost per unit is $425. What is the additional profit contribution from sales if credit standards are relaxed?

To be truly marketable, a security must have three basic characteristics: a ready market, risk-free, and safety of principal.

The Solar Inc. has daily cash receipts of $90,000. A recent analysis of its collections indicated that customers' payments were in the mail for an average of 4 days. Once received,the payments are processed in one and a half days. After payments are deposited, it takes an average of two and a half days for these receipts to clear the banking system. If the firm's opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $8,000 to reduce collection float by 2 days?

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. -A decrease in collection efforts by a firm will result in ________ in sales volume, ________ in the investment in accounts receivable, ________ in bad debt expenses, and ________ in collection expenditures.

A firm that is unable to pay its bills as they come due is said to be insolvent.

A relaxation of credit standards is expected to affect profits positively due to lower carrying costs, whereas tightening credit standards would affect profits negatively as a result of higher carrying costs.

Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits.

The General Chemical Company uses 150,000 gallons of hydro chloric acid per month. The cost of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a constant rate throughout the year. It takes 18 days to receive an order once it is placed. The reorder point is ________.

A firm has a cash conversion cycle of 60 days. Annual outlays are $12 million and the cost of financing is 12 percent. If the firm reduces its average age of inventory by 10 days, the annual savings is ________. (Assume a 365-day year.)

In working capital management, risk is measured by the probability that a firm will be ________.

Controlled disbursing is a method of consciously anticipating the mail, processing, and clearing time involved with the payment process.

When a firm initiates or increases a cash discount, the net effect on the accounts receivable investment is difficult to determine because the nondiscount takers paying earlier will reduce the accounts receivable investment, while the new customer accounts will increase this investment.

Most federal agency issues have short maturities and offer slightly higher yields than U.S. Treasury issues having similar maturities.

Too much investment in current assets reduces firm's profitability, whereas too little investment in current assets increases the risk of not being able to pay debts as they come due.

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 marginal investment in accounts receivable under the proposed plan? (See Table 15.7)

Jia's Jewelers has seasonal financing needs that vary from $250,000 to $2,725,000. The permanent financing requirement is $4,100,000. Check the appropriate box indicating the better strategy for each of the following events.

A firm has an operating cycle of 170 days, an average payment period of 50 days, and an average age of inventory of 145 days. The firm's average collection period is ________ days.

Depository banks holding Eurodollar deposits are ________.

In economic conditions characterized by a scarcity of short-term funds, a firm would best choose the ________ financing strategy.