Exam 16: Supply chains and working capital management

Newsome Inc.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?

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer.Still, suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

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

Pascarella Inc.is revising its payables policy.It has annual sales of $50, 735, 000, an average inventory level of $15, 012, 000, and average accounts receivable of $10, 008, 000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1, 946, 000 and accounts receivable by $1, 946, 000.What will be the net change in the cash conversion cycle, assuming a 365-day year?

Which of the following statements is NOT CORRECT?

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15, 000, what pre-tax net annual savings would be realized?

A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days.Assuming a 365-day year, what is the length of its cash conversion cycle?

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

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1)when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2)long-term loan agreements are more complex.

Which of the following actions would be likely to shorten the cash conversion cycle?

Firms generally choose to finance temporary current operating assets with short-term debt because

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