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Exam 18: Current Asset Management

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Question 41

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The collection process is a fairly inexpensive component of doing business, although sometimes difficult to implement.

A) True
B) False

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Question 42

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Changes in a firm's collection policy can affect sales, working capital, and even additional funds needed.

A) True
B) False

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Question 43

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Which statement best describes cash management?

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

If the yield curve is upward sloping, then which type of marketable securities, assumed to be held for emergencies, should be held in a firm's portfolio?

The average collection period is calculated by dividing total sales by accounts receivable. It is an effective measure for internal use in monitoring a firm's collections.

Scenario Aberwald Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.) -Refer to Scenario Aberwald. How many orders should Aberwald place during the year?

Since a tighter collection policy is very likely to reduce sales, such a change in policy should not be considered.

Martell-Webb Inc. sells to customers all over Canada, and payment cheques come in to its headquarters in Toronto. 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 is considering a regional lockbox system to speed up collections, and it believes the lockboxes will reduce receivables by 20%. If the annual cost of the system is $15,000, what would the estimated pre-tax net annual savings be if the firm implements the lockbox system?

Although firms do not segregate funds for various motives of holding cash, they do consider them in setting their overall cash positions.

Bello Inc. had sales of $2,500,000 per year (all credit) , and its DSO was 35 days. What was its average amount of accounts receivable outstanding, based on a 365-day year?

Decisions on granting credit, or changing credit or collection policies, involve an analysis of the magnitude and timing of the cash flow and the risks and returns expected. This evaluation is done with a net present value framework.

Scenario Aberwald Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.) -Refer to Scenario Aberwald. If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

Suppose a firm has seasonal sales and customers that all pay promptly at the end of 30 days. Which of the following statements is NOT correct?

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

Because money has time value, cash sales are always more profitable than credit sales.

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

The EOQ model minimizes total inventory costs.

Which statement best describes cash management?

Suppose a firm changes its credit policy from 2/10, net 30, to 3/10, net 30. The change is meant to meet competition, so no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change.