Exam 15: Working Capital and Current Assets Management

A firm has an average age of inventory of 101 days, an average collection period of 49 days, and an average payment period of 60 days. The firm's cash conversion cycle is ________ days.

If a firm's credit period is decreased, the sales volume can be expected to ________, the investment in accounts receivable can be expected to ________, and the bad debt expenses can be expected to ________.

Maggie's Gold Coins, Inc. is considering shortening its credit period from 30 days to 20 days and believes, as a result of this change, its average collection period will decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease from 1.2 percent to 0.8 percent of sales. The firm is currently selling 300,000 units but believes as a result of the change, sales will decline to 275,000 units. On 300,000 units, sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are $300,000. The firm has a required return on similar-risk investments of 15 percent. Evaluate this proposed change and make a recommendation to the firm.

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 net result of increasing the cash discount? (See Table 15.7)

A firm which uses the aggressive financing strategy plans to purchase raw materials in large quantities to take price discounts. The firm will finance the purchase with a long-term loan. The most likely consequence of this action is ________.

A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's average age of inventory is ________ days.

The total cost of a firm's inventory is found by summing the ________.

A firm's credit selection is the process of determining the minimum requirements for extending credit to a customer.

The key dimension of credit selection which analyzes an applicant's ability to repay the requested credit focused on cash flows available is ________.

Certain financing plans are termed conservative when ________.

An increase in the current asset to total asset ratio will result in ________.

A negative cash conversion cycle ________.

A firm is considering relaxing credit standards, which will result in annual sales increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from $1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is ________. (Assume a 360-day year.)

When maintaining appropriate inventory level, a purchasing manager should ________.

A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm currently pays 12 percent for financing and reduces its cash conversion cycle to 50 days, the annual savings is ________. (Assume a 365-day year.)

One major risk a firm assumes in an aggressive financing strategy is ________.

A firm's credit selection procedures must be established on a sound economic basis that considers the costs of investigating the creditworthiness of a customer and the expected size of its credit purchases.

Table 15.2 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent. -The firm's initial ratio of current assets to total assets is ________. (See Table 15.2)

A(n) ________ in current assets increases net working capital, thereby ________ the risk of insolvency.

Which of the following is a major external source of credit information?