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Exam 18: Current Asset Management

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Question 1

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In addition to being a substitute for cash balances, marketable securities are used as a temporary investment.

A) True
B) False

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True

Question 2

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Which of the following statements best describes DSO?

A) Other things held constant, the higher a firm's DSO, the better its credit department.
B) If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
C) If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts.

D) All of the above
E) B) and C)

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Question 3

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

Assume that Aberwald holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that Aberwald will have on hand at any time, i.e., what will be the inventory level right after a delivery is made?

Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys tablets in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

What would be the incremental cost of carrying receivables if this change were made?

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

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

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule, then why might a firm take this action?

The just-in-time inventory control requires firms to maintain little to no inventory; however, it requires total quality management on all areas of operations.

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals, etc.

What are the incremental pre-tax profits from this proposal?

If Aberwald holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

Suppose you have $10,000 in your chequing account. You write a cheque for $2,000 and deposit $3,000. What is your collection float?

A JIT system is designed to stretch accounts payable as long as possible.

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?

If a company increases its safety stock, then its average inventory will go up.

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.

Synchronization of cash flows is an important cash management technique, as it can reduce the required cash balance and increase a firm's profitability.

Which of the following is NOT correct?