3B Flashcards
(108 cards)
1
Q
The amount of inventory that a company would tend to hold in stock would increase as the:
sales level falls to a permanently lower level.
cost of carrying inventory decreases.
cost of running out of stock decreases.
length of time that goods are in transit decreases.
A
cost of carrying inventory decreases.
2
Q
The ____is the least amount of inventory that should be ordered given the various costs involved. The ____model (EOQ) provides a formula for determining the quantity of a particular inventory item that should be ordered in order to minimize inventory costs.
EOQ = Square root of (2DS/Ci)
D = The demand per year in units
S = Setup or ordering cost per order or batch
C = The cost per unit
i = The carrying costs expressed as a percentage
A
economic order quantity
3
Q
RATIOS/FORMULA
Cost of Goods Sold
Inventory Turnover
Number of Days Sales in Inventory
Safety stock
Daily Usage
ROI
Return on Assetst
Reorder Point
A
COGS= Sales - Gross Profit
Inventory Turnover = Cost of Goods Sold / Average Inventory
Number of Days Sales in Inventory = 360 / Inventory Turnover
Safety Maximum Usual Daily
stock = (lead time - lead time) x usage
DDaily usage = Total units / time period
ROI: Net income / Invested CAP
ROA: Net Income / Avg Total Assets
Reorder = usage per day x lead time
4
Q
Reasons for not minimizing inventory levels
- ___ = guarantee availability of inventory as needed
- __- = customers can be convinced to purchase larger quantities
- If ___is very high, suppliers may feel the need to increase inventory levels to insure prompt deliveries to customers.
- Inventories can be a good hedge against inflation if the ___
- ___is a level of inventory that is held in excess of the desired inventory level to cover unanticipated demand.
A
Larger inventory Discounts/favorable credit terms competition cost of replacing inventory is increasing. Safety stock
5
Q
The ___ratio measures the speed with which inventory can be converted into sales. I
WHATS THE RATIO?
___increase as the size of the order increases. _____ costs, however, decrease as the size of the production run or order increases.
A
inventory turnover
Avg Inventory
CarryingCost. Set-up or ordering
6
Q
Reasons a low turnover can happen
- ___ items
- Unanticipated ___ demand
- Build-up to meet expected future demand T/F
- Build up to avoid price increases / inflation T/F
- Build up , anticipating a strike or shortage T/F
A
Obsolete
Weak
7
Q
DAYS SALES IN INVENTORY
This measures the number of months it takes to sell the inventory.
What is the ratio?
IS a high or a low ratio preferred?
This is NOT a good indicator of how long it takes a company to turn inventory into cash.
A
False - number of days
Ratio = 360 / Inventory turnover
Low ratio is preferred
Falses -yes it is
8
Q
Selected financial statement data for company Aye is shown as follows:
Additional paid-in capital $ 20,000
Accounts payable (current) 40,000
Accounts receivable (net) 100,000
Cash and marketable securities 70,000
Common stock 150,000
Notes payable (long-term) 50,000
Property, plant, and equipment (net) 150,000
Retained earnings 60,000
What is Aye’s net working capital?
A
$130k
Net working capital is current assets minus current liabilities.
Aye’s net working
capital = Current assets - Current liabilities
= Cash + Accounts receivable - Accounts payable
= $70,000 + $100,000 - $40,000
= $130,000
9
Q
Current assets − Current liabilities = ???
A
Current assets − Current liabilities = Net working capital
10
Q
A firm’s dividend policy may treat dividends either as the residual part of a financing decision or as an active policy strategy.
Treating dividends as the residual part of a financing decision assumes that:
earnings should be retained and reinvested as long as profitable projects are available.
dividends are important to shareholders, and any earnings left over after paying dividends should be invested in high-return assets.
dividends are relevant to a financing decision.
dividends are costly, and the firm should retain earnings and issue stock dividends.
A
earnings should be retained and reinvested as long as profitable projects are available.
11
Q
OVERVIEW
The sources of financing for an organization can be found on the right side of the balance sheet—debt and \_\_
A
debt and equity.
12
Q
The _____ theory indicates that the order of financing of a company (or project) follows the path of least effort.
- Companies use ____ financing first
- ____ will be adapted to financing needs
3/ If outside financing is required, a company will start w/ the ___ secuirty first
A
Internal
Dividend Policy
Cheapest
13
Q
Spotech Co.’s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively. Short-term interest rates are expected to average 5%. If Spotech could increase inventory turnover from its current eight times per year to 10 times per year, its expected cost savings in the current year would be:
A
$165,625
The key to this problem is to determine how much inventory is reduced by the increased inventory turnover and the resulting savings in interest costs due to reduced working capital requirements.
The formula for inventory turns is annual cost of sales divided by inventory. Solve for inventory by dividing annual cost of sales by inventory turns.
Initially, Spotech has an inventory level of $16,562,500 ($132,500,000 divided by 8 turns). Spotech hopes to decrease the level to $13,250,000 by increasing inventory turns to 10 ($132,500,000 divided by 10 turns)
. Working capital is reduced by this change in inventory ($16,562,500 - $13,250,000 = $3,312,500). The interest avoided on the $3,312,500 represents a savings of $165,625 ($3,312,500 × 5%).
14
Q
Which of the following effects would a lockbox most likely provide for receivables management?
Minimized collection float
Maximized collection float
Minimized disbursement float
Maximized disbursement float
A
Min collection float
Without the use of a lockbox, the payer writes and mails the payment. The payee receives the check that is processed in-house for one to two days before being deposited in the payee’s bank. It will generally take two days for the funds to clear the Federal Reserve System before those funds are available in the payee’s bank account.
A lockbox system allows the payment to go directly from the payer to the bank, thus eliminating the in-house processing at the payee’s office. In such a scenario, the collection float is reduced by one to two days.
15
Q
A____is a system where checks are sent to post office boxes rather than corporate headquarters. Funds are collected y the bank.
A \_\_\_\_ can significantly reduce the time required to receive funds and make them available for use T/F
A
lockbox
16
Q
The following information was taken from the income statement of Hadley Co.:
Beginning inventory $17,000
Purchases 56,000
Ending inventory 13,000
What is Hadley Co.’s inventory turnover?
A
Cost of goods sold equals beginning inventory of $17,000 plus purchases of $56,000, less ending inventory of $13,000, for cost of goods sold of $60,000.
Average inventory is beginning inventory of $17,000 plus ending inventory of $13,000 divided by 2, or $15,000.
Inventory turnover is cost of goods sold ($60,000) divided by average inventory ($15,000), or 4.0.
17
Q
All of the following about the economic order quantity (EOQ) model are true, except:
the EOQ model is designed to determine an optimal order size that will minimize inventory costs.
the use of a just-in-time inventory system makes the EOQ model irrelevant.
the values in the EOQ model cannot remain constant for any material length of time during a period of inflation.
the reorder quantity determined using the EOQ model is best for companies requiring flexibility.
A
the reorder quantity determined using the EOQ model is best for companies requiring flexibility.
The EOQ model determines a particular reorder quantity. However, some companies require a great deal of flexibility in taking advantage of an opportunity to stockpile inventory before a price increase or as a protection against shortages.
Although the EOQ model provides valuable information in regard to the optimal reorder quantity, it does not give management flexibility.
Since the just-in-time inventory system does not require inventory, this inventory system makes the EOQ model irrelevant.
18
Q
The gross margin ratio can be subjected to detailed analysis by a firm’s:
creditors.
customers.
investors.
management.
A
management.
Sales = Unit Price x Number of Units
COGS = Unit Cost x Number of Units
GM= (Unit Price - Unit Cost) x Number of Units
The above detailed information is available only to the firm’s management.
Thus, a detailed analysis could not be performed by the other parties mentioned.
19
Q
The ___ratio compares the gross profit generated by the net sales revenue
WHATS THE RATIO
This ratio is generally more useful to management than to creditors or investors since the data necessary to analyze why changes occurred in the ratio are only available internally. T/F
A
gross margin
Gross margin Gross margin in ratio = -----------------
Net sales revenue
True
20
Q
Each of the following periods is included when computing a firm’s target cash conversion cycle, except the:
inventory conversion period.
payables deferral period.
average collection period.
cash discount period.
A
Cash Discount Period
The cash conversion cycle is the amount of time it takes between investing cash in inventory and eventual recovery of cash due to the sale of the inventory. C
21
Q
The ___cycle is the amount of time it takes between investing cash in inventory and eventual recovery of cash due to the sale of the inventory.
It represents the amount of time that funds are tied up in ____
A
cash conversion
non-cash current assets.
22
Q
OVERVIEW - PERIODS
The ___period is the average time that inventory is held in days before being sold.
The \_\_\_\_period is the average time that receivables are outstanding before they are turned into cash.
The ____period is the average time that short-term obligations related to the purchase/production of inventory are outstanding.
A
inventory conversion
receivables collection
payables deferral
23
Q
Which of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?
This market provides more funds at lower rates than other methods provide.
The borrower avoids the expense of maintaining a compensating balance with a commercial bank.
There are no restrictions as to the type of corporation that can enter into this market.
This market provides a broad distribution for borrowing.
A
There are no restrictions as to the type of corporation that can enter into this market
24
Q
_____is short-term, unsecured notes that are offered by stable companies
The advantages of commercial paper include:
- Additional source of funds
- Higher rates than traditional bank loan
- Absence of costly financing arrangements & compensating balance
- If repeatedly issued, it improves borrower’s reputation in the financial markets
The primary disadvantage of commercial paper is that if a firm is facing temporary financial difficulties, it would not be able to utilize this source of funding. T/F
A
Commercial paper
T
F - Lower Rates
T
T
True
25
Morton Company needs to pay a supplier's invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.
Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is:
13.33%
The invoice total less the cash discount ($50,000 - 2%) is $49,000.
Morton Co. must borrow $54,444 ($49,000 plus compensating balance of 10% of loan). To calculate: $49,000 represents 90% of the loan. $49,000 ÷ .9 = $54,444.
Interest at 12% per annum on this amount for 30 days, totals:
0.12 × (30 ÷ 360) × $54,444 = $544.44
The effective yield is then (annualized):
$544.44 ÷ $49,000 × 12 months = 0.1333, or 13.33%
26
Which of the following cash management techniques focuses on cash disbursements?
Lockbox system
Zero-balance account
Preauthorized checks
Depository transfer checks
Zero-balance account
A zero balance account (imprest fund) is a checking account that normally carries a zero balance.
As the checks clear, the balance in the account equals the outstanding checks, and when all have cleared, the balance in the account is again zero. It is a common control on cash disbursements.
A lockbox system is used with cash deposits, not cash disbursements
27
____accounts are held at zero until a claim is made against the account. At that time, the holding bank transfers sufficient funds from an interest-bearing account to the zero balance account. The firm must have at least one additional account with the bank, and there is generally a small fee associated with transfers.
A zero balance account can be effectively used by an organization when the interest earned in the interest-bearing account is greater than the fees associated with the transfers of funds. T/F
Zero balance
True
28
Edwards Manufacturing Corporation uses the standard economic order quantity (EOQ) model. If the EOQ for Product A is 200 units and Edwards maintains a 50-unit safety stock for the item, what is the average inventory of Product A?
150
The average inventory level when the standard economic order quantity model is used is one-half of the EOQ.
The EOQ for Product A is 200 units. One-half of 200 is 100.
Add the 50-unit safety stock to arrive at 150 units as the average inventory of Product A.
29
A company uses the following formula in determining its optimal level of cash:
C* = Square root of 2bT/i
Where:
```
b = Fixed cost per transaction
i = Interest rate on marketable securities
T = Total demand for cash over a period of time
```
This formula is a modification of the economic order quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the interest rate on marketable securities is 6% per year. The company estimates that it will make cash payments of $12,000 over a 1-month period. What is the average cash balance (rounded to the nearest dollar)?
This is the square root of 2 times the fixed cost ($10) times the total demand in one month ($12,000) divided by the interest rate for one month (.06 divided by 12). Of course you need to use the interest rate for one month, not one year, because the applicable period of time is one month
The average cash balance will be one-half of the optimal level of cash because the balance will be used down to zero and will be replenished to the optimal level. The average of zero and $6,928 is the sum (0 + $6928) divided by 2, or $3,464.
30
FOUR REASONS TO HOLD CASH
1. ____purposes - day to day biz
2. ___purpose - unanticipated fluctuations
3. ____Purpose - take advantage of biz opps
4. Meet ____balance requirements
___cash flows matches the cash outflows with the timing of the receipt of cash inflows.
Transaction
Precaution
Speculative
Compensating balances
Synchronizing
31
If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year.
31.81%
Terms of trade credit of 3/10, net 45 means a 3% discount may be taken if the bill is paid in 10 days or the full amount must be paid in 45 days.
the actual interest rate for the period is derived by calculating .03 ÷ .97 or 3.093%.
This interest rate is charged over a time period of 35 days (45 days minus 10 days).
There are 10.286 35-day periods in 360 (360 ÷ 35).
Therefore, the cost of not taking the discount on an annual basis is 10.286 × 3.093% or 31.81%.
32
To determine the inventory reorder point, calculations normally include the:
ordering cost.
carrying cost.
average daily usage.
economic order quantity.
average daily usage.
The reorder point (RP) is the inventory level at which an order is placed. The reorder point is average demand during the lead-time period plus any safety stock.
33
A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle?
The cash conversion cycle is the time between the investment of cash in inventory and the return of cash after the sale and collection of the related account receivable
. In this case, cash is not invested in the inventory until 30 days into the 60-day inventory conversion cycle.
The remaining 30 days of the inventory conversion cycle plus the 15-day receivable collection period results in a 45-day cash conversion cycle.
34
The Dixon Corporation has an outstanding 1-year bank loan of $300,000 at a stated interest rate of 8%. In addition, Dixon is required to maintain a 20% compensating balance in its checking account. Assuming the company would normally maintain a zero balance in its checking account, the effective interest rate on the loan is:
10%
The $300,000 loan is going to cost Dixon Corporation $24,000 (8% times $300,000).
However, if the bank is going to require a 20% compensating balance, then Dixon Corporation will only have an effective use of $240,000 ($300,000 - ($20% × $300,000)).
The $24,000 interest charge then becomes interest on $240,000, (the amount that Dixon is allowed to use of the $300,000 loan).
$24,000 ÷ $240,000 represents an effective interest rate of 10%.
35
Financial information about a company is as follows:
Receivables $ 4,000,000
Inventory 2,600,000
Payables 3,700,000
Sales 50,000,000
Cost of goods sold 45,000,000
Assuming a 365-day year, what is the number of days in the company's cash conversion cycle?
20.3 days
```
DIO = $2,600,000 ÷ ($45,000,000 ÷ 365) = 21.09
DSO = $4,000,000 ÷ ($50,000,000 ÷ 365) = +29.20
DPO = $3,700,000 ÷ ($45,000,000 ÷ 365) = -30.01
CCC = 20.28, or 20.3 rounded
```
36
___is the difference between the company's checkbook balance and the bank's balance.
It represents the __effect of checks in the process of collection.
Checks written by the firm create disbursement float and reduce the ___.
Checks received and deposited by the firm create collection float and increase the __.
As checks are cleared, the bank cash position is reconciled to the __cash position.
Float
net
book cash
book balance
book
37
____ are official bank checks that provide a means of moving funds from one account to another within the banking system
Depository transfer checks (DTCs)
38
Assumptions of economic order quantity analysis include the following:
____for the good is known.
Total carrying costs vary with ___ordered.
Costs of placing an order are unaffected by ___.
Purchase costs per unit are not affected by __
Periodic demand
quantity
quantity ordered
quantity discounts.
39
Which of the following ratios is appropriate for the evaluation of accounts receivable?
Days sales outstanding
Return on total assets
Collection to debt ratio
Current ratio
Days sales outstanding
The collection to debt ratio is incorrect because the question asks about receivables, not debt.
40
The ___ is a sterner test for liquidity than the current ratio due to the fact that it includes only the more liquid of the current assets in the calculation.
RATIO?
quick ratio (acid-test ratio)
Quck = Current Assets - Inventory
-------------------------------------------
Current Liabilities
41
The ____ratio measures both the quality and liquidity of the accounts receivable.
RATIO?
The accounts receivable turnover ratio measures both the quality and liquidity of the accounts receivable.
Net credit sales
A/R turnover = --- ------------------------
Average accounts receivabl
42
A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average 4% during the year, the additional annual income (loss) from using the lockbox service would be:
-$6K
In this question, the daily cash receipts of $150,000 can earn interest for four days at the annual rate of 4%:
Interest = Principal x Rate x Time
= $150,000/day x .04/year x 4 days
= $24,000
The cost to the company is the monthly bank fee of $2,500. Net annual loss is:
$24,000 - ($2,500 × 12) = $24,000 - $30,000 = $(6,000)
43
Morton Company needs to pay a supplier's invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.
The amount Morton Company must borrow to pay the supplier within the discount period and cover the compensating balance is:
$50,000(1.00 - 0.02) + 0.10(Loan) = Loan
$49,000 + 0.10X = X
$49,000 = X - 0.10X
$49,000 = 0.90X
$54,444 = X
Basically, you need to borrow $49k. The $49k is the invoice less the cash discount. Since you want to take the discount, you'll need to borrow the invoice less the discount.
You need a 10% compensating balance. You need to borrow $49k, so the $49k is only 90% of the loan you'll need and the 10% is the remaining amount.
$49k / .90 = $54,444.
44
Creditors of a corporation should monitor that corporation's:
debt to equity ratio.
times interest earned number.
debt to equity ratio and times interest earned number.
None of the answer choices are correct.
Both
Times interest earned indicates the “cushion” related to a firm's ability to pay interest on debt. It is computed by dividing income before interest and taxes by interest expense.
45
Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials?
Materials requirements planning
Cycle counting
Safety stock reorder point
Economic order quantity
Materials Req Planning
Materials requirements planning (MRP) is ordering raw materials and other components used in manufacturing based on needs for completed products.
46
Cyber Company's current ratio is 3 to 1 and current liabilities total $62,000. What is Cyber's net working capital?
124K
Current assets = 3 (Current liabilities)
= 3 ($62,000)
= $186,000
Net working capital = Current assets - Current liabilities
= $186,000 - $62,000
= $124,000
47
A company wants to approximate the 12% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?
2. 00%, 15, net 45
1. 00%, 15, net 45
0. 75%, 10, net 30
0. 50%, 10, net 30
1.00%, 15, net 45
365
______________________________
Total Credit Period − Discount Period
×
Percentage of Discount
_____________________
100% − Percentage of Discount
Answer= (365/(45-15) x (1% / 99%) = 12.3% (closest to 12%)
Note: 1/99 = .010101010. You have to times this by 100.
Question #
401215
48
Quality Supply Company (QSC) has a current ratio 2.5 to 1. Partial end-of-year data for QSC includes:
Cash $ 50,000
Net accounts receivable 80,000
Inventories 120,000
QSC's quick or acid-test ratio is:
1.3
400476 if you cant figure out
49
Marketable securities are low-risk investments that can quickly be turned into cash. Which of the following is not a marketable security?
U.S. Treasury bills
Bank certificates of deposit
Stocks
Commercial paper
stock
50
Marketable securities are generally High-risk investments that can be quickly turned into cash (HIGHLY LIQUID). Marketable securities include:
(1) U.S. Treasury bills.
(2) bank certificates of deposit.
(3) commercial paper.
false - they're low risk
51
Gartshore, Inc., is a mail-order book company. The company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio for obtaining credit is 70% and its required rate of return is 12%. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 to 40 days. Ignoring any tax implications, what is the cost of carrying additional investment in accounts receivable, using a 360-day year?
$1,512
Cost of holding accounts receivable before credit policy change: $360,000 sales ÷ 360 days = $1,000 average daily sales:
30 days average collection period = $30,000 average A/R balance
12% required rate of return = $3,600 annual interest
Cost of holding accounts receivable after credit policy change: $432,000 sales ÷ 360 days = $1,200 average daily sales:
40 days average collection period = $48,000 average A/R balance
12% required rate of return = $5,760 annual interest
$5,760 - $3,600 = $2,160 additional annual interest on holding A/R balance.
he actual investment by Gartshore is its variable cost, which for a mail-order book company represents cost of goods purchased for sale. That is, there is no change in fixed costs. Consequently, the $2,160 needs to be reduced to represent only the interest on the variable cost portion: $2,160 × 70% variable cost = $1,512.
52
Super Mart reported the following information in its most recent financial statements:
Sales $2,100,000
Gross profit 600,000
Cash (beginning) 100,000
Cash (ending) 120,000
Accounts receivable (beginning) 300,000
Accounts receivable (ending) 275,000
Inventories (beginning) 240,000
Inventories (ending) 300,000
Super Marts' number of days sales in inventory (use 360 days) was ________ days.
65
Cost of Goods Sold = Sales - Gross Profit
= $2,100,000 - $600,000
= $1,500,000
Inventory Turnovers = Cost of Goods Sold / Average Inventory
= $1,500,000 / (0.5 x ($240,000 + $300,000))
= $1,500,000 / (0.5 x $540,000)
= $1,500,000 / $270,000
= 5.56 times
Number of Days Sales in Inventory = 360 / Inventory Turnover
= 360 / 5.56
= 64.74 or 65 days
53
The ability to manage cash effectively requires a knowledge of disbursement float. The time necessary to clear funds received can be decreased through use of all of the following, except:
wire transfers.
an overdraft system.
a concentration bank.
a lockbox.
Overdraft System
An overdraft system allows a company to “overdraw” on a checking account since the bank will automatically transfer funds from an interest-bearing account of the company's to cover the checks presented for payment.
Wire transfers, concentration banks, and lockboxes are used to speed up the collection process.
54
Southern Corp. has a debt-to-equity ratio of 1.75 and total assets of $275 million. Southern is considering issuing another $20 million of debt and another $20 million of equity. What will be Southern's debt-to-equity ratio after the issuance?
1.63.
The debt-to-equity ratio is total liabilities divided by total equities; we also know two relationships:
Assets = Debt + Equity, so $275M = Debt + Equity
Debt/Equity = 1.75, so Debt = 1.75 Equity
Now we can substitute into the first equation and solve for Equity:
$275M = (1.75 Equity) + 1.0 Equity
$275M = 2.75 Equity
$100M = Equity
Now solve for Debt:
Debt = 1.75 Equity = 1.75 × $100M = $175M
Finally, the $20 million increase:
De
bt ÷ Equity = ($175M + $20M) ÷ ($100M + $20M) = $195M ÷ $120M = 1.63
55
The Jones Company is considering using a lockbox system. The company has gathered the following information:
The per-check processing cost will be $0.20.
The days saved in the collection process will be 1.2 days.
The average size of the check will be $1,000.
If funds are freed, they could be invested at a 5% annual rate.
On average, 150 checks will be processed per day.
Should the Jones Company adopt the lockbox system, and why or why not?
No, since the benefit to the company is $0.17 per check processed.....WHY?
The cost to the company in terms of the cost per check being cleared can be stated as:
Cost per check cleared = (D)(S)(i)
D = days saved in the collection process
S = average check size
i = daily interest rate or opportunity cost (5% ÷ 360 = .0139%)
Substituting the given information into the equation:
Cost per check cleared = 1.2 days × $1,000 × .0139% = $0.17 per check cleared
Since the cost of the service would be $.20 per check cleared, the Jones Company should not adopt this alternative.
56
```
___= (D)(S)(i)
D = days saved in the collection process
S = average check size
i = daily interest rate or opportunity cost
```
ost per check cleared
57
The level of safety stock in inventory management depends on all of the following except the:
level of uncertainty of the sales forecast.
level of customer dissatisfaction for back orders.
cost of running out of inventory.
cost to reorder stock.
Cost to Reorder stock
The level of safety stock does not depend on the cost to reorder stock.
Safety stock is held in order to avoid the likelihood of a stock out, or running out of inventory.
A higher level of safety stock is needed when sales forecasts are uncertain.
Customers dislike waiting for orders to be filled, and lead time from suppliers is uncertain.
58
Clauson, Inc., grants credit terms of 1/15, net 30 and projects gross sales for next year of $2 million. The credit manager estimates that 40% of their customers pay on the discount date, 40% on the net due date, and 20% pay 15 days after the net due date. Assuming uniform sales and a 360-day year, what is the projected days sales outstanding (rounded to the nearest whole day)?
27 days
40% of 15 days = 6 days;
40% of 30 days = 12 days;
20% of 45 days = 9 days.
The sum of these is 6 days + 12 days + 9 days, which equals 27 days.
59
A company has the following information in its financial records:
Beginning Balance Ending Balance
----------------- --------------
Cash $ 3,900 $ 3,000
Marketable securities 3,800 4,400
Accounts receivable 14,600 12,900
------- -------
Total current assets $22,300 $20,300
```
Net sales $103,200
Expenses 20,430
--------
Net income $ 82,770
What is the company's receivable turnover ratio?
```
7.5 times
The accounts receivable turnover can be calculated as follows:
Net sales ÷ Average accounts receivable = $103,200 ÷ (($14,600 + $12,900) ÷ 2) = 7.5 times
60
Marsh, Inc., is experiencing a sharp increase in credit sales activity and has, therefore, had a steady increase in production. Management has also adopted an aggressive working capital policy by decreasing the inventory conversion period and holding the receivables collection period and the payables deferral period constant. Original inventory levels were higher than accounts receivable. Therefore, the company's current level of net working capital:
would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment.
would most likely be higher than under other business conditions so that there will be sufficient funds to replenish assets.
can be financed most economically through the sale of common stock.
would most likely be higher than under other business conditions as the company's profits are increasing.
BE LOWER
s sales increase, accounts receivable, a component of current assets, will increase providing the receivable collection period (average accounts receivable/average sales per day) remains constant. If credit sales increase by 10%, receivables would be expected to increase by 10%, thus increasing working capital.
As sales and production increase, accounts payable and accrued production costs will increase providing the payables deferral period (average payables/average purchases per day) remains constant. If purchases and production increase by 10%, accounts payable and payables related to variable production costs would be expected to increase by 10% thus decreasing working capital.
owever, since the inventory conversion period has decreased, this means that inventory would have decreased or increased slower than sales.
Overall it decreased
61
Super Sets, Inc., manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent (70%) of Super Set customers take discounts and pay on Day 10, while the remaining 30% pay on Day 30. What is the average collection period in days?
This problem requires the calculation of the weighted average of the two classes of collection patterns:
10 days x .70 = 7 days
30 days x .30 = 9 days
-------
Total 16 days
62
extensive use of financial leverage.
that assets are over-valued.
extensive use of financial leverage and that assets are over-valued.
None of the answer choices are correct.
extensive use of financial leverage.
Financial leverage involves using borrowed funds to finance asset acquisition(s) which will generate returns exceeding the cost of borrowing. Thus, a higher debt to total assets ratio points toward the likelihood of more extensive financial leverage usage.
63
Garo Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit terms are 2/10, net 30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and Garo pays net 30?
The 30 in “2/10 net 30” means the total amount of the invoice must be paid in 30 days.
The 2% discount ($2) is really potential interest that could be charged on the principal amount of $98. This results in an interest rate that is really 2/98 or 2.041% for 20 days2.041
2 If the discount is not taken, the cash is held onto for an additional 20 days (30 - 10 = 20).
In a 360-day year, 20 days represents 18 periods. 18 × 2.041% = 36.738%, or 36.7%.
64
A corporation manages inventory performance by monitoring its inventory turnover. Selected financial records for the corporation are as follows:
Year 1 Year 2 Year 3
---------- ---------- ----------
Annual sales $1,262,500 $1,062,500 $1,459,000
Gross profit % 45% 30% 40%
The beginning finished goods inventory for Year 2 was 20% of Year 2 sales. The ending finished goods
inventory for Year 2 was 18% of Year 3 sales. What was the corporation's inventory turnover for Year 2?
3.13
Cost of goods sold:
Gross profit for Year 2 = $1,062,500 × 0.30 = $318,750
Year 2 gross profit is revenue less cost of goods sold (CGS), so:
$1,062,500 - CGS = $318,750
CGS = $1,062,500 - $318,750 = $743,750 (or 70% of $1062500)
Average inventory:
Beginning finished goods inventory was 0.20 × $1,062,500, or $212,500.
Ending finished goods inventory was 0.18 × $1,459,000, or $262,620.
Average inventory = (Beginning inventory + Ending inventory) ÷ 2 = ($212,500 + $262,620) ÷ 2 = $237,560
Inventory turnover = Cost of goods sold ÷ Average inventory = $743,750 ÷ $237,560 = 3.13
65
All of the following are inventory carrying costs except:
storage.
insurance.
opportunity cost of inventory investment.
inspections.
Inspections
Inventory carrying costs are those costs incurred as a result of holding inventory for a period of time. All of the following are considered carrying costs:
Storage
Insurance
Opportunity cost of inventory investment (i.e., the lost return that could have been earned by investing the cash used to purchase the inventory in some other way)
The cost of inspections is not a function of the holding of inventory.
66
PRICE EARNINGS T//F
The price-earnings ratio is a combination of the performance measure of the past (earnings per share) to perceptions of the future.
The price-earnings ratio indicates the relationship of ____ to ____
The price-earnings ratio is computed by dividing earnings per share by the market price of the stock.
A high price-earnings ratio is a possible indication of a growth company and/or of a low-risk organization.
T
Common Stock to Net Earnings
F
T
The price-earnings ratio is computed by dividing earnings per share by the market price of the stock'
The price-earnings (P/E) ratio is computed by
dividing the market price of the stock
____________________________
earnings per share
(not earnings per share by the market price of the stock).
67
A potential problem indicated by a higher than industry average inventory turnover is risk of:
high storage costs.
obsolescence.
stockouts.
building up excessive funds in inventory.
Stockout
additional inventory provides security from stockouts
68
Tyler Company imports and sells infant clothing items to retailers. Last year, Tyler reported the following partial results in its financial statements:
Sales $3,500,000
Beginning accounts receivable 250,000
Beginning inventories 300,000
Ending accounts receivable 350,000
Ending inventories 200,000
Assuming that Tyler's inventory turnover ratio was 10, what was cost of goods sold?
If Inventory turnover = Cost of goods sold / Average inventory, then:
10 = Cost of goods sold / (0.5 x ($300,000 + $200,000))
10 = Cost of goods sold / $250,00
$250,000 x 10 = Cost of goods sold
$2,500,000 = Cost of goods sold
69
What is the relationship between the allowance for doubtful accounts and working capital?
When bad debts expense is recorded for the period, working capital decreases.
When bad debts expense is recorded for the period, cash increases.
When an account is written off against the allowance, working capital decreases.
When an account is written off against the allowance, cash decreases
When bad debts expense is recorded for the period, working capital decreases.
Writing an account receivable off against the allowance is a wash entry
70
Shaw Corporation is considering a plant expansion that will increase its sales and net income. The following data represents management's estimate of the impact the proposal will have on the company.
Current Proposal
---------- ----------
Cash $ 100,000 $ 120,000
Accounts payable 350,000 430,000
Accounts receivable 400,000 500,000
Inventory 380,000 460,000
Marketable securities 200,000 200,000
Mortgage payable (current) 175,000 325,000
Fixed assets 2,500,000 3,500,000
Net income 500,000 650,000
The effect of the plant expansion on Shaw's net working capital would be:
a decrease of $30,000.
400431
71
The gross margin ratio of a firm is affected by changes in:
cost per unit.
unit sales price.
both cost per unit and unit sales price.
both
72
Assume that each day a company writes and receives checks totaling $10,000. If it takes five days for the checks to clear and be deducted from the company's account, and only four days for the deposits to clear, what is the float?
$10k ... NOT $-10k
the company enjoys a net 1-day float on the checks it writes of $10,000.
73
At the end of its fiscal year, Krist, Inc., had the following account balances:
```
Cash $ 5,000
Accounts receivable 10,000
Inventory 20,000
Accounts payable 15,000
Short-term note payable 5,000
Long-term note payable 35,000
```
What is Krist's quick (acid-test) ratio?
.75
74
A company has an outstanding 1-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan?
10%
```
Full amount of loan $500,000
Stated interest rate 8%
Compensating balance ($500,000 x 0.20) $100,000
Annual interest expense ($500,000 x 0.08) $ 40,000
```
The effective interest rate for the loan requiring a compensating balance would be:
Annual interest expense ÷ (Full loan amount - Compensating balance)
= $40,000 ÷ ($500,000 - $100,000) = 0.10 (10%)
75
A firm's current ratio is presently 1.75 to 1. According to a working capital restriction in the firm's bond indenture, the firm will have technically defaulted if the current ratio falls below 1.5 to 1. If current liabilities are presently $250 million, the maximum new commercial paper that can be issued to finance inventory expansion an equivalent amount without technically defaulting i
125M ... only including info i didn't know
$437.5m + Inc in Inv
-------------------- = 1.50
250m + Inc in Inv
$437.5m + Inc in Inv = 1.5 ($250m + Inc in Inv)
$437.5m - $375m = 1.5 Inc in Inv - Inc in Inv
$62.5m = 0.5 Inc in Inv
Inc in Inv = $125m
Inc in inv = increase in investments
76
A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?
.78
77
A zero balance account is held at zero until a claim is made against the account. Which of the following is not a characteristic of a zero balance account?
When a claim is made, the holding bank transfers the funds.
When a claim is made, it comes from a non-interest-bearing account.
Firms must have at least two accounts with the bank.
An extra fee is associated with the transfer.
When a claim is made, it comes from a non-interest-bearing account.
78
Canseco Enterprises uses 84,000 units of Part No. 256 in manufacturing activities over a 300-day work year. The usual lead time for the part is six days; occasionally, the lead time has gone as high as eight days. The company now wants to implement a safety stock policy (it presently has none). The safety stock size, the likely effect on stockout costs, and the likely effect on carrying costs, respectively, would be:
560 units, decrease stock out cost, increases carry cost
84,000
Daily usage = -------- = 280 units
300 days
Safety Maximum Usual Daily
stock = (lead time - lead time) x usage
= (8 days - 6 days) x 280 units
= 560 units
As a result of the two days' safety stock the likelihood of a stockout and incurrence of stockout costs will decrease.
However, because of the additional 560 units carried in inventory, inventory carrying costs will increase.
79
When the economic order quantity (EOQ) model is used for a firm which manufactures its inventory, ordering costs consist primarily of:
insurance and taxes.
obsolescence and deterioration.
storage and handling.
production setup.
production setup.
80
An increase in which of the following should cause management to reduce the average inventory?
The cost of placing an order
The cost of carrying inventory
The annual demand for the product
The lead time needed to acquire inventory
The cost of carrying inventory
Inventory decision models work with opposing costs. Carrying costs increase as the size of the order increases. Setup or ordering costs, however, decrease as the size of the production run or order increases.
The annual demand for the product" is incorrect because an increase in annual demand for the product will cause management to carry more units in inventory, increasing the average inventory on hand.
81
The CFO of a company is concerned about the company's accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company's accounts receivable turnover ratio?
Pledging the accounts receivable to a finance company
Changing customer terms to 1/10, net 30
Entering into a factoring agreement with a finance company
Changing customer terms to 3/20, net 30
Entering into a factoring agreement with a finance company
Factoring is a situation where a company sells its accounts receivable at a discount, thus resulting in an immediate receipt of cash related to the receivables sold. This situation would likely improve the company's accounts receivable turnover.
Everything else would worsen it
82
Depository transfer checks, also called official bank checks, are related to or characterized by each of the following except:
cashable at any bank.
involve a concentration bank.
are non-negotiable.
payable to a single company account.
cashable at any bank
Depository transfer checks, or official bank checks, are used to move funds from one account to another as part of a firm's cash management process. These checks are not cashable at any bank. They are related to the characteristics described in the other answers.
83
Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost?
Economic order quantity
Just-in-time
Materials requirements planning
ABC
EOQ
Economic order quantity (EOQ) is the quantity of inventory that should be ordered at one time in order to minimize the associated costs of carrying and ordering inventory, such as purchase-order processing, transportation, and insurance.
JIT reduces the cost of carrying inventory but does not equate inventory carry costs with restocking costs.
MRP does not attempt to equalize restocking and carrying costs.
The ABC inventory management system establishes priorities based on valuation of the inventory items. It has nothing to do with ordering points.
84
T/F Regarding Working Cap
current liabilities are an important source of financing for many small firms.
the hedging approach to financing involves matching maturities of debt with specific financing needs.
an aggressive working capital policy focuses on high profitability potential, despite the cost of high risk and low liquidity.
financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy.
T
T
T
F -- Although financing permanent current asset increases with long-term debt rather than short-term debt is wise, this is not an example of an aggressive working capital policy. An aggressive policy would work to reduce current assets, in relation to current liabilities.
85
When managing cash and short-term investments, a corporate treasurer is primarily concerned with:
maximizing rate of return.
minimizing taxes.
investing in common stock due to the dividend exclusion for federal income tax purposes.
liquidity and safety.
liquidity and safety.
Of the answer provided, only liquidity and safety are issues a corporate treasurer is primarily concerned with when managing cash and short-term investments. The decision to keep cash and short-term investments is made in order to provide immediately available funds.
Immediate availability requires liquidity and the assurance that there is no risk regarding the value of the funds (safety).
86
MARKETABLE SECURITIES
Marketable securities are held as a substitute for __
Marketable securities are held as ___to be used to meet seasonal needs or to protect against business downturns
Marketable securities can be used as a temporary place for funds received but yet to be invested in long-term investments or capital additions. T/F
With the use of ___, the need for marketable securities has diminished for companies that have access to such financing options.
cash
temporary investments
true
lines of credit
87
Your firm currently has on hand some idle cash that will be needed in three months to pay dividends to shareholders. Which of the following would be the most appropriate investment for that cash?
30-year U.S. Treasury bonds with a current annual yield of 7.8%
Ford Motors' long-term AAA-rated bonds with a current annual yield of 9.25%
Shares of Ford Motors' common stock, which have been appreciating in price approximately 6% annually and paying a quarterly dividend that is the equivalent of a 5% annual yield
90-day Ford Motors commercial paper with a current annual yield of 6%
90 day ford commercial paper
When in doubt - choose commercial paper
Commercial paper is short-term unsecured debt that may be issued directly to a purchaser on a discount basis and set to mature on a specific date. By purchasing directly, broker fees and other changes are avoided.
88
Cash discounts are used to incentivize customers to make early payments. Discounts provide all of the following except:
price reduction for customers.
a way to increase orders.
a means of attracting new customers.
a way to reduce the average collection period.
Seasonal discounts are also offered by some organizations. By placing an order by a specified date, customers are offered discounts even if the merchandise is shipped months later T/F
a way to increase orders.
True
89
Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for Newman?
Considering that each proposal will produce equivalent processing results, the optimal proposal for Newman will be the lowest cost proposal. Consequently, to solve this problem, the costs of each of the proposals must be calculated.
700 checks × $0.50 × 360 days = $126,000 per year
$125,000 per year
$1,800 per check × 700 checks × 360 days × 0.03% = $136,080
$1,750,000 × 7% = $122,500
90
Management would like to calculate return on investment (ROI) for the current year. The following information is available:
Operating assets at the end of the yr $6,600,000
Operating assets at the beg. of the year 5,400,000
Sales 1,150,000
Operating expenses 550,000
What percentage amount is the ROI?
ROI = Net income / Invested capital
($1,150,000 - $550,000)
_______________________
(($6,600,000 + $5,400,000) ÷ 2)
$600,000 = 10%
$6,000,000
ROI is also referred to as return on invested capital or return on assets (ROA)
91
The return on __ratio measures the productivity of assets in terms of producing incom
___is the most common profitability ratio and focuses on the optimal use of invested capital
OI is also referred to as return on invested capital or return on assets (ROA) T/F
assets
Return on investment (ROI)
True
92
A zero balance account is:
a checking account that substitutes drafts for regular checks so that management does not have to keep funds in the account for check clearing.
a checking account that moves funds from a local bank to a concentration bank; therefore, the balance maintained in the account is zero.
a checking account that maintains a zero balance since funds only sufficient to cover the checks presented are transferred from another account.
None of the answer choices are correct.
a checking account that maintains a zero balance since funds only sufficient to cover the checks presented are transferred from another account.
A zero balance account is one that maintains a zero balance since funds only sufficient to cover the checks presented are transferred from another account.
93
Dartmoor Company's budgeted sales for the coming year are $40,500,000, of which 80% are expected to be credit sales at terms of n/30. Dartmoor estimates that a proposed relaxation of credit standards would increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit standards would result in an expected increase in the average accounts receivable balance of:
1,620,000
The firm wants to relax credit standards and increase the average collection period. Previous sales are $40,500,000 and 80% of these, or $32,400,000, are credit sales.
The new policies will increase these credit sales by 20%, to $38,880,000 ($32,400,000 × 1.20).
Under the old system, the average day's credit sales were $32,400,000 ÷ 360 or $90,000.
Each day's credit sales remained in accounts payable for 30 days, so the total amount in accounts payable under the old system was $90,000 × 30 days = $2,700,000.
Under the new system, average day's credit sales will be $38,880,000 ÷ 360, or $108,000.
These daily sales will remain in accounts payable for 40 days, so the new accounts receivable balance will be $108,000 × 40 = $4,320,000.
The expected increase in accounts receivable will be ($4,320,000 - $2,700,000) = $1,620,000.
94
The following computations were made from Clay Co.'s 20X1 books:
Number of days sales in inventory 61
Number of days sales in trade A/R 33
What was the number of days in Clay's 20X1 operating cycle?
61+33=94
```
# of days in = # of days + # of days sales
Op cycle sales in inventory in accounts receivable
```
95
```
# of days in = ???? +?????????
Op cycle
```
```
# of days in = # of days + # of days sales
Op cycle sales in inventory in accounts receivable
```
96
Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear's return on equity?
14.7%
Assets total $2,500,000. The sum of liabilities and equity also equals $2,500,000.
The company will have debt equal to 40% of the $2,500,000, or $1,000,000.
That leaves equity of $1,500,000. Since the profit is 11% of the $2,000,000 sales, the company has a profit of $220,000.
Return on equity is net income divided by equity; profit of $220,000 divided by equity of $1,500,000 gives return on equity of 14.7%.
97
In computing the reorder point for an item of inventory, which of the following is used?
Cost
Usage per day
Lead time
II & III
The reorder point is the inventory level at which an order for the inventory item is submitted. The formula is:
Reorder point = Usage per day × Lead time
OR
(Avg use per day * lead time) + safety stock
98
Which one of the following transactions would increase the current ratio and decrease net profit?
A federal income tax payment due from the previous year is paid.
A long-term bond is retired before maturity at a discount.
A stock dividend is declared.
Vacant land is sold for less than the net book value.
Vacant land is sold for less than the net book value.
The current ratio is calculated by dividing Total Current Assets by Total Current Liabilities. When vacant land is sold, it is presumed cash is received (a current asset) and a long-term asset is removed (land)
Book value of an asset is the historical cost less the accumulated depreciation. When an asset is sold below book value, the remaining value of the asset must be written off. This is expensed in the current period as a loss on the disposal of an asset. This would decrease net profit.
99
The following information is for the Just Made It Company in regard to a ziget used in the production process.
Note: Needed in days
Highest # of units expected to be needed 1,600 units
Lowest # of units expected to be needed 1,000 units
Lead time 5 days
Safety stock 2,000 units
Calculate the replenishment point (order point).
RP = (Average daily use x Lead time in days) + Safety stock
= (((1,600 + 1,000) / 2) x 5 days) + 2,000
= 8,500 units
100
Mein Co.'s sales totaled $300,000 for the current year. Mein's cost of goods sold was $150,000. Mein's accounts receivable balance was $20,000 on January 1 and $30,000 on December 31. What was Mein's accounts receivable turnover rate for the current year?
12
101
The Huron Corporation purchases 60,000 head bands per year. The average purchase lead time is 20 working days. Maximum lead time is 27 working days. The corporation works 240 days per year.
Huron Corporation should reorder head bands when the quantity in inventory reaches:
Daily usage = toal amount / available days
60k/240 = 250 units
Safety stock = (max lead time - avg lead time) * daily usage
Safety stock = (27-20) * 250 = 1750 units
Reorder point = avg use per day+ safety stock
Reorder point = (20 days * 250 units) + 1750 = 6750
102
s it relates to accounts receivable, a mathematical relationship that can define the optimal credit level is:
Carrying costs = Cost of capital.
Carrying costs = Opportunity costs.
Total costs = Opportunity costs.
Total costs = Cost of capital.
carrying cost = opportunity cost
Accounts receivable are at the optimal level when Carrying costs = Opportunity costs.
Carrying costs are costs that are associated with the granting of credit (such as bad debts), the costs of managing that credit, and the delay in receiving cash.
Opportunity costs are sales that are lost from refusing to offer credit.
103
___is the economic profit as opposed to the GAAP profit.
Economic value added (EVA)
104
Which of the following terms refers to a performance measurement that is calculated as an investment center's after-tax operating income minus the product of its total assets multiplied by the company's weighted-average cost of capital (WACC)?
ROI
False -Economic Value Added
105
A cash budget is based upon the following estimates, except:
estimated sales.
estimated purchases and payments.
estimates for borrowing.
estimates for stock buybacks.
estimates for stock buybacks.
The cash budget is a cash management tool that details cash inflows and outflows over a specified period of time. Although the cash budget is used for potential dividend payments, stock buybacks are usually one-time events and therefore not a regular part of the cash budget.
106
Which of the following represents a firm's average gross receivable balance?
Days sales in receivables × Accounts receivable turnover
Average daily sales × Average collection period
Net sales ÷ Average gross receivables
II Only
Average daily sales times average collection period represents a firm's average gross receivable balance.
Because the average collection period is the time it takes to collect on a sale, , multiplying this by average daily sales would give you the average gross receivable balance
107
Which of the following cash management techniques focuses on cash disbursements?
Lockbox system
Zero balance account
Preauthorized checks
Depository transfer checks
Zero balance account
108
Troy Toys is a retailer operating in several cities. The individual store managers deposit daily collections at a local bank in a non-interest bearing checking account. Twice per week, the local bank issues a depository transfer check (DTC) to the central bank at headquarters. The controller of the company is considering using a wire transfer instead. The additional cost of each transfer would be $25; collections would be accelerated by two days; and the annual interest rate paid by the central bank is 7.2% (0.02% per day). At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of DTC? Assume a 360-day year.
Any amount greater than $62,500
A process that accelerates transfer of cash by two days earns 0.04% (2 days × 0.02%/day) in interest on that cash.
Transfer Amount (Principal) = Interest Earned ÷ Interest Rate
Transfer Amount = $25 ÷ .0004 or $62,500
