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Exam 21: Supply Chains and Working Capital Management

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Question 71

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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?

A) $24,057
B) $26,730
C) $29,700
D) $33,000
E) $36,300

F) D) and E)
G) B) and D)

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Question 72

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

A) True
B) False

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Question 73

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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?

The maturity matching,or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high,short-term assets will be financed with long-term debt to reduce costs.

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

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.

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?

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.

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

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Which of the following statements is CORRECT?

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.

Whaley & Whaley has the following data.What is the firm's cash conversion cycle? $\begin{array}{llcc} \text { Inventory conversion period = } & \text {41 days} \\ \text {Average collection period = } & \text {31 days}\\ \text { Payables deferral period = } & \text {38 days}\\\end{array}$

Kiley Corporation had the following data for the most recent year (in millions) .The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000,and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore,she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made,by how many days would the cash conversion cycle be lowered? $\begin{array}{c}\begin{array}{lll}\\ \text {Annual sales: unchanged}\\ \text {Cost of goods sold: unchanged}\\ \text {Average inventory: lowered by \$ 4,000 }\\ \text {Average receivables: lowered by \$ 2,000 }\\ \text {Average payables: increased by \$ 2,000 }\\\text { Days in year } \end{array}\begin{array}{lll}\underline{\text { Original}}\\ \$ 110,000 \\ \$ 80,000 \\ \$ 20,000 \\\$ 16,000 \\ \$ 10,000 \\365\end{array}\begin{array}{lll}\underline{\text { Revisen}}\\ \$ 110,000 \\\$ 80,000 \\\$ 16,000 \\\$ 14,000 \\\$ 12,000 \\365\end{array}\end{array}$

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Which of the following statements is NOT CORRECT?

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

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