Exam 2: Homework #2 Flashcards
(22 cards)
which of the following is true when managing working capital accounts?
a. Pay accounts payable immediately even if suppliers do not offer high discounts for early payment
b. Use as little labor as possible to manufacture the product while producing a quality product
c. Maintain extra raw material inventories to prevent causing manufacturing delays
d. Delay collecting accounts receivables from customers
b. Use as little labor as possible to manufacture the product while producing a quality product
Which of the following statements is true?
a. Cash conversion cycle = DSO + DSI - DPO
b. Cash conversion cycle = DSO + DSI + DPO
c. Cash conversion cycle = DSO - DPO
d. Cash conversion cycle = DSO + DPO - DSI
Cash conversion cycle = DSO + DSI - DPO
Trends Foods distributes its products to more than 100 restaurants and delis. The company’s collection period is 32 days, and it keeps its inventory for 10 days. What is Trend’s operating cycle?
Operating cycle = DSO + DSI
= 32 + 10
= 42 days
Stamp, Inc. has an operating cycle of 81 days and takes 47 days to collect on its receivables. What is its level of inventory if the firm’s cost of goods sold is $312, 455?
Operating cycle = DSO + DSI
DSI = OC - DSO = 81 - 47 = 34 days
DSI = 34 days = Inventory / COGS/365 = Inventory / $312, 455/365 = Inventory / $856.04
Inventory = 34 x $856.04 = $29,105.40
Le Baron Company has an operating cycle of 123 days. The firm’s days’ sales in inventory is 73 days. How much does the firm have in receivable if it has credit sales of $433,450
Operating cycle = DSO + DSI
DSO = OC - DSI = 123 - 73 = 50 days
Credit sales = $433,450
DSO = Accounts receivables / Credit sales/365 = Accounts receivables / $433,450/365
Accounts receivables = 50 x $1,187.53 = $59,376.71
You are provided the following working capital information for the Ridge Company:
Ridge Company
Account
Inventory $12,890
Accounts receivable 12,800
Accounts payable 12,670
Credit sales $124,589
Cost of goods sold 99,630
A: 38.3 days
DSO = Accounts receivables / Credit sales/365 = $12,800 / $124,589/365
DSI = Inventory / COGS/365 = $12,890 / $99,360/365
Operating cycle = DSO + DSI
= 37.5 +47.2
= 84.7 days
DPO = Accounts payables / COGS/365 = $12,670 / $99,630/365
Cash conversion cycle = DSO+DSI-DPO
= 37.5+47.2-46.4
= 38.3 days
Wolfgang Electricals estimates that the company takes 31 days on average to pay off its suppliers. It also knows that it has days’ sales in inventory of 54 days and days’ sales outstanding of 34 days. What is its cash conversion cycle?
Cash conversion cycle = DSO + DSI - DPO = 34 + 54 - 31= 57 days
Renald Corp. estimates that the company takes 27 days on average to pay off its suppliers. It also knows that it has days’ sales in inventory of 43 days and days’ sales outstanding 45 days/ What is it cash conversion cycle?
Cash conversion cycle = DSO + DSI - DPO = 45 + 43 - 37 = 61 days
Your boss asks you to compute the company’s cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $126,300, accounts receivable were $97,900, and accounts payable were at $115,100. You also see that the company had credit sales of $324,000 and that cost of goods sold was $282,000. What is your firm’s cash conversion cycle?
A: 125 days
DSO = Accounts receivables / Credit sales/365 = $97,900 / $324,000/365 = 110.3 days
DSI = Inventory / COGS/365 = $126,300 / $283,000/365 = 163.5 days
DPO = Accounts payables / COGS.365 = $115,100 / $282,000/365 = 149 days
Cash conversion cycle = DSO+DSI-DPO
= 110.3+163.5-149 = 124.8 days or 125 days
The aging schedule:
a. shows the breakdown of a firm’s accounts receivable by their date of payment
b. cannot identify delinquent accounts until they are paid
c. is an important financial tool for analyzing the quality of a company’s receivables
d. is an important financial tool for analyzing the quality of a company’s payables
c. is an important financial tool for analyzing the quality of a company’s receivables
Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company?
A: 9.24%
Amount to be borrowed =$50,000
Stated annual interest rate = 8.5%
Compensating balance = 8%
Amt deposited as compensating balance = $50,000x0.08 = $4000
Effective borrowing amount =$50,000-$4000 = $46,000
Interest expense =$50,000x0.085 = $4,250
Effective interest rate =Interest expense / Effective borrowing amount = $4,250 / $46,000 = 9.24%
Sun Prairie Traders borrowed $63,000 at an APR of 10 percent. The loan called for a compensating balance of 10 percent. What is the effective interest rate on the loan?
A: 11.11%
Amount to be borrowed =$63,000
Stated annual interest rate = 10%
Compensating balance = 10%
Amt deposited as compensating balance = $63,000x0.10 =$6,300
Effective borrowing amount = $63,000-$6,300 = $56,700
Interest expense = $6,300x0.10=$6,300
Effective interest rate =$6,300/$56,700 = 11.11%
Which of the following is a short-term financing instrument?
a. Bank loans with a maturity of more than 1 year
b. Medium term bonds
c. Accounts receivable
d. Accounts payable
d. Accounts payable
Working capital efficiency is most commonly measured by a firm’s:
a. cash conversion cycle
b. operating cycle
c. inventory cycle
d. cash balance
a. cash conversion cycle
You have been asked by supervisor to figure out the firm’s cash conversion cycle. After checking the financial statements, you see that the average inventory was $20,000, accounts receivables were $15,500, and accounts payables were $12,000. You also notice the company had sales of $145,000 and that its cost of goods sold was $111,600. Given these numbers, the firm’s cash conversion cycle is: (Assume 365 days in a year. Do not round intermediate calculations)
A: 65.18 days
DSI = 365 days / (COGS/Accounts payable) = 365 / ($111,600/$20,000) = 65.41 days
DSO = 365 days / (Net sales/Accounts receivable) = 365 / ($145,000/$15,500) = 39.02 days
DPO = 365 days / (COGS / Accounts payable) = 365 / ($111,600/$12,000) = 39.25 days
Cash conversion cycle = DSI + DSO - DPO = 65.41 + 39.-2 - 39.25 = 65.18 days
A company increasing its credit terms for customers from 1/10, net 30 to 1/10,k net 60 will likely experience:
a. Higher net income
b. An increase in the average collection period
c. A higher level of uncollectible accounts
d. An increase in cash on hand
b. An increase in the average collection period
Working capital would include:
a. retained earning
b. marketable securities
c. goodwill
d. property, plant, and equipment
b. marketable securities
The Sun Glass Shack has annual sales of $730,000, and it has $100,000 of accounts receivable. Based on a 365-day year, what is days’ sales outstanding?
A: 50 days
Days’s sales outstanding = 365 days / (Net sales / Accounts receivable) = 365 / ($730,000 / $100,000) = 50 days
A firm’s operating cycle can be calculated by:
a. Days payable outstanding + Days sales outstanding
b. Days payables outstanding + Cash Conversion Cycle
c. Days sales in inventory + Cash Conversion Cycle
d. None of the above
b. Days payables outstanding + Cash Conversion Cycle
The Jones Company has a DSO of 35 days and a DSI of 20 days. Therefore, its operating cycle is:
A: 55 days
Operating cycle = DSI + DSO = 20 days + 35 days = 55 days
Coral Gables Inc. produces multiple flavors of cupcakes. The board has decided that it wants to determine the company’s working capital efficiency so that it can compare it to other firms in the food industry. The CFO has calculated its days’ sales inventory (DSI) is 70 days, its day’s sales outstanding (DSO) is 40 days, however it takes 50 days to pay cash to its suppliers (DPO). What is Coral Gables/ cash conversion cycle?
A: 60 days
Cash Conversion Cycle = DSI + DSO - DPO = 70 days + 40 days - 50 days = 60 days
A candy manufacturer following a maturity matching strategy would generally finance inventory build-up prior to Halloween by:
a. issuing common stock
b. using accounts payable
c. issuing long-term debt
d. selling equipment
b. using accounts payable
