Exam 16: Supply chains and working capital management

Baltimore Baking is preparing its cash budget and expects to have sales of $30, 000 in January, $35, 000 in February, and $35, 000 in March.If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Shorter-term cash budgets¾say a daily cash budget for the next month¾are generally used for actual cash control while longer-term cash budgets¾say monthly cash budgets for the next year¾are generally used for planning purposes.

Which of the following statements is CORRECT?

Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done, by how much would receivables decline? Use a 365-day year.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Which of the following statements concerning the cash budget is CORRECT?

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Which of the following statements is CORRECT?

Arnold Inc.purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375, 000.What is the firm's average accounts payable balance? (Assume a 365-day year.)

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Net working capital is defined as current assets divided by current liabilities.

Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount)are $800, 000 per year.What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Firms hold cash balances in order to complete transactions (both routine and precautionary)that are necessary in business operations and as compensation to banks for providing loans and services.

Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount.One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Blueroot Inc.is considering a change in its financing policy.Currently, it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time.The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11, 760 per day, using a 365-day year.The interest rate on the notes payable is 10%, and the tax rate is 40%.If the firm implements the plan, what is the expected change in net income?