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Exam 18: Current Asset Management

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Question 51

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A firm's investment in accounts receivable is largely influenced by production process and the requirements imposed by competition.

A) True
B) False

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Question 52

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A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

A) True
B) False

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Question 53

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

What would be the incremental bad debt losses if the change were made?

Fullerton Wine Company is a retailer that sells vintage wines. The company has established a policy of reordering inventory every 30 days. A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal policy? Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $10 per unit Total sales for year = 1,000 units Safety stock = 0

For a typical nonfinancial company, a small portion of its assets is held in the form of cash, defined as demand deposits and currency.

Other things held constant, which circumstance will cause an increase in net operating working capital?

When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.

DSO analysis of accounts receivable is the most robust way to see if customers are, on average, paying more slowly, because it is unaffected by seasonal changes in sales.

The primary reason to monitor aggregate accounts receivable is to see if customers, on average, are paying more slowly.

Scenario BC Prints BC Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the DSO is 60 days, and the bad debt loss percentage is 5%. Also, BC Prints' cost of capital is 15%, and its variable costs total 60% of sales. Since BC Prints wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000 and that 50% of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4%. -Refer to Scenario BC Prints. What would be the cost to BC of the discounts taken?

Net operating working capital, defined as current assets minus current liabilities, is also equal to the current ratio.

Lockbox arrangements are one way for a firm to speed up collection of payments from customers.

A lockbox plan is most beneficial to which firms?

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

If your firm's DSO and/or aging schedule deteriorates from the first quarter of the year to the second quarter, this is proof positive that your firm's credit policy has weakened.

Cash is often referred to as a nonearning asset. Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Marketable securities are liquid assets. Holding too low an amount of these liquid assets may adversely affect a firm's creditworthiness and lower its credit rating, resulting in higher future costs for securing both short- and long-term funds.

Depreciation and obsolescence are inventory carrying costs.

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