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Exam 15: Managing Short-Term Assets

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Question 21

Multiple Choice

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The value of checks that have been written and disbursed but have not been deducted from the account on which they were written is the __________ float.

A) disbursement
B) net
C) collections
D) balance
E) deposit

F) None of the above
G) A) and B)

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Question 22

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The net float is the difference between the disbursement float and the collections float.

A) True
B) False

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Question 23

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The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest payments on its debt.

Two commonly used methods of monitoring receivables are the DuPont method and the aging schedule.

Fullerton Wine Company is a retailer which 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

East Lansing Appliances East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent. -Refer to East Lansing Appliances.What are the incremental pre-tax profits from this proposal?

If the forecasted sales or usage rate is not accurate,the EOQ model may not lead to efficient inventory management.

Which of the following would cause average inventory holdings to decrease,other things held constant?

Which of the following statements is correct?

If the carrying costs of inventory increase then the economic ordering quantity of inventory will increase to insure the firm minimizes the total inventory 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.

Which of the following might be attributed to efficient inventory management?

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Short term assets generally earn a higher rate of return than long-term assets,making short term assets a more desirable investment than long-term assets.

A report showing how long accounts receivable have been outstanding is called what?

Credit associations and credit reporting agencies are two major sources of external credit information on credit customers.

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.If the lead time for placing an order is 5 days,and Aberwald holds a safety stock equal to a 30-day supply of chips,then at what inventory level should an order be placed?

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

Fashion Clothiers Inc. Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost. -Refer to Fashion Clothiers Inc.Now,suppose the manufacturer offers a discount of 0.5 percent for orders of at least 40,000 yards.Should Fashion Clothiers increase its ordering quantity to take the discount?