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Exam 18: Current Asset Management

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Question 1

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Credit standards refer to the financial importance of a potential customer to the firm in order to qualify for credit.

A) True
B) False

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Question 2

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Crystal Clear Company purchases 50,000 litres of distilled water each year.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80%.The purchase price to CCC is $0.50 per litre.Management currently orders the EOQ each time an order is placed.No safety stock is carried.The supplier is now offering a quantity discount of $0.03 per litre if CCC orders 10,000 litres at a time.Should CCC take the discount?

A) No, the cost exceeds the benefit by $500.
B) No, the cost exceeds the benefit by $1,000.
C) Yes, the benefit exceeds the cost by $500.
D) Yes, the benefit exceeds the cost by $1,120.

E) B) and D)
F) C) and D)

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Question 3

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An increase in a current asset must be accompanied by a corresponding increase in a current liability.

Ontario Corp.Assume that Ontario Corp. has sales of 1,000 units per year. Further, assume that Ontario Corp. can order the material at a cost of $.50 per order, plus fixed ordering costs of $.75 per order. The firm's carrying cost is 3% of the inventory value, at cost. -Refer to Scenario: Ontario Corp.What is Ontario Corp.'s EOQ?

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.

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

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.

Which describes the variables that determined the average accounts receivable balance?

Which of the following best describes one of the goals of cash management,given that it is referred to as a "non-earning" asset?

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.

Which one of the following has nothing to do with inventory management?

Which items does a firm's credit policy consist of?

BC PrintsBC 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?

Wintoki Company writes cheques averaging $15,000 a day,and it takes 5 days for these cheques to clear.The firm also receives cheques in the amount of $17,000 per day,and it takes 3 days for these cheques to be deposited and cleared.What is the firm's net float,in dollars?

The addition of a safety stock to the EOQ model does not change the total inventory costs.

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?

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

The EOQ model minimizes total inventory costs.

Which of the following best describes the two key drivers in a just-in-time inventory system?

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?