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Exam 17: Supply Chains and Working Capital Management

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Question 31

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Albrecht Inc.is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000.If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

A) $260,642
B) $274,360
C) $288,800
D) $304,000
E) $320,000

F) B) and C)
G) A) and D)

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Question 32

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The four primary elements in a firm's credit policy are (1) credit standards, (2) cash discounts offered, (3) credit period, and (4) collection policy.

A) True
B) False

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Question 33

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The aging schedule is a commonly used method for monitoring receivables.

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

If a firm's suppliers stop offering cash discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Which of the following statements is NOT CORRECT?

If a firm sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

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?

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.

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

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

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.)

Taylor Textbooks Inc.buys on terms of 2/15, net 50 days.It does not take discounts, and it typically pays on time, 50 days after the invoice date.Net purchases amount to $450,000 per year.On average, what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Which of the following statements is CORRECT?

Hinkle Corporation buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $550,000 per year.On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

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

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?