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Exam 16: Supply Chains and Working Capital Management

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Question 61

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The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

A) 16.05%
B) 16.90%
C) 17.74%
D) 18.63%
E) 19.56%

F) All of the above
G) A) and D)

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Question 62

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Freeman Builders, Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

A) 10.86%
B) 12.07%
C) 13.41%
D) 14.90%
E) 16.55%

F) A) and B)
G) A) and E)

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Question 63

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If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

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.)

An increase in any current asset must be accompanied by an equal increase in some current liability.

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.

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.)

If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

Which of the following statements is CORRECT?

The calculated cost of trade credit can be reduced by paying late.

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital.Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Data on Liu Inc.for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done, by how much would inventories decline? Use a 365-day year. $\begin{array}{lr}\text { Cost of goods sold = } & \$ 85,000 \\\text { Inventory }= & \$ 20,000 \\\text { Inventory conversion period (ICP) }= & 85.88 \\\text { Benchmark inventory conversion period (ICP) }= & 38.00\end{array}$

Which of the following statements is NOT CORRECT?

Frosty Corporation has the following data, in thousands.Assuming a 365-day year, what is the firm's cash conversion cycle? $\begin{array}{lr}\text { Annual sales }= & \$ 45,000 \\\text { Annual cost of goods sold = } & \$ 31,500 \\\text { Inventory }= & \$ 4,000 \\\text { Accounts receivable }= & \$ 2,000 \\\text { Accounts payable }= & \$ 2,400\end{array}$

Shorter-term cash budgets⎯say a daily cash budget for the next month⎯are generally used for actual cash control while longer-term cash budgets⎯say monthly cash budgets for the next year⎯are generally used for planning purposes.

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

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

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?

Brothers Breads has the following data.What is the firm's cash conversion cycle? $\begin{array}{ll}\text { Inventory conversion period }= & 50 \text { days } \\\text { Average collection period }= & 17 \text { days } \\\text { Payables deferral period }= & 25 \text { days }\end{array}$

Safety Window and Door Co.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 $450,000 per year.On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)