Ch18 Test Bank – Cash Conversion, Inventory And Receivables

Chapter 18 – Cash conversion, inventory and receivables management

MULTIPLE CHOICE

1. The time from the receipt of raw materials to the collection of the cash for the sale of the finished good is called a company’s:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

2. The inventory control system technique that segregates inventory into three groups is called the:

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

3. Which of the following is not one of the five Cs of credit?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

4. The terms of sale for customers are called the:

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

5. Bavarian Brew has an average age of inventory of 34 days and an average collection period of 26 days. What is the company’s operating cycle?

34 + 26 = 60

PTS: 1 DIF: E

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

6. Bavarian Brew has an average age of inventory of 34 days, an average collection period of 26 days and an average payment period of 15 days. What is the company’s cash conversion cycle?

34 + 26 – 15 = 45

PTS: 1 DIF: E

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

7. Bavarian Brew has an average age of inventory of 34 days, an average collection period of 26 days and a cash conversion cycle of 15 days. What is the company’s average payment period?

34 + 26 – 14 = 45

PTS: 1 DIF: E

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

8. Bavarian Brew has an average payment period of 34 days, an average collection period of 26 days and a cash conversion cycle of 15 days. What is the company’s average age of inventory?

15 + 34 – 26 = 23

PTS: 1 DIF: M

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

9. Bavarian Brew has an average payment period of 34 days, an average age of inventory of 26 days and a cash conversion cycle of 15 days. What is the company’s average collection period?

15 – 26 + 34 = 23

PTS: 1 DIF: M

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 10 to 23.

Bavarian Brew is producing and selling brewery equipment to microbreweries nationwide. Bavarian is charging $14 000 per unit and all of their sales are on credit. Under the current credit policy Bavarian Brew expects to sell 500 units. The variable costs are $7000/unit and fixed costs are $1 500 000 per year. The company is thinking about changing its credit terms from net 30 to 3/10 net 30. The effect of this change would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2% to 4% of sales. The company expects 75% of its customers to take advantage of the cash discount. Currently the company has an average collection period of 38 days: 30 days until the customers mail their payments and another 8 days to process the payments once they arrive. Bavarian Brew’s opportunity cost of funds invested in accounts receivable is 12%.

10. What is Bavarian Brew’s marginal profit from increased sales?

25(14 000 – 7000) = 175 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

11. What is Bavarian Brew’s total variable cost of annual sales under the old credit policy?

500(7000) = 3 500 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

12. What is Bavarian Brew’s total variable cost of annual sales under the new credit policy?

525(7000) = 3 675 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

13. What is Bavarian Brew’s accounts receivables turnover under the old credit policy?

365/38 = 9.61

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

14. What is Bavarian Brew’s accounts receivables turnover under the new credit policy?

0.75(10) + 0.25(30) + 8 = 23

365/23 = 15.87

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

15. What is Bavarian Brew’s average investment in accounts receivables under the old credit policy?

3 500 000/9.61 = 364 203.95 or roughly 364 204

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

16. What is Bavarian Brew’s average investment in accounts receivables under the new credit policy?

3 675 000/15.87 = 231 568.99 or roughly 231 569

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

17. What is Bavarian Brew’s cost of the marginal investment in accounts receivables?

(231 569 – 364 204)(0.12) = –15 916

PTS: 1 DIF: M

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

18. What is Bavarian Brew’s bad debt expense under the old credit policy?

7 000 000(0.02) = 140 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

19. What is Bavarian Brew’s bad debt expense under the new credit policy?

7 350 000(0.04) = 294 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

20. What is Bavarian Brew’s cost of marginal bad debts?

294 000 – 140 000 = 154 000

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

21. What is Bavarian Brew’s new average collection period if it introduces the new credit terms?

(0.75 × 10 days + 0.25 × 30) + 8 days = 23

PTS: 1 DIF: M

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

22. What is Bavarian Brew’s cost savings from the reduced investment in accounts receivables if it implements the new credit terms?

Current A/R = (7000 × 500)(38/365) = 364 384

New A/R = (7000 × 525)(23/365) = 231 575

Savings = 364 384 – 231 575 = 132 809(0.12) = 15 937

PTS: 1 DIF: M

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

23. What is Bavarian Brew’s net profit from the proposed change in credit terms?

Marginal profit from new sales = 25(14 000 – 7 000) = 175 000

Cost savings A/R = 132 809(0.12) =  15 937

Cost of cash discount = 0.03 × 14000 × 525 × 0.75 = 165 375

Net profit = 175 000 + 15 937 – 165 375 = 25 562

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

24. Miller’s Toys has an average inventory of 2000 toy trucks. The carrying cost per unit per year is $0.10. Miller’s places an order for 3200 toy trucks on the first of each month and the order cost is $20. What is the economic order quantity?

Annual inventory needs = 3200 × 12 = 38 400

EOQ = [(2 × 38 400 × 20)/0.10]^1/2 = 3919

PTS: 1 DIF: M

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

25. The length of time from the receipt of inventory until it is sold is:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

26. The operating cycle is the length of time from the receipt of inventory until the:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

27. The time between the points when a company pays for raw materials and receives payment for finished goods is:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

28. If a company has been experiencing increased sales while its inventory levels have decreased, then its inventory turnover is ___________ and its average age of inventory is __________.

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

29. Which of the following, considered independently of the others, would increase the cash conversion cycle?

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

31. A company that moves from traditional inventory stocking methods to a just-in-time system should expect to see its inventory turnover _________ and its average of inventory _________.

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

32. If a company is contemplating a relaxation of its credit standards, which of the following might be expected to result?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 33 to 27.

Smart Products buys 300 000 units of a crucial input per year from a supplier that fulfils its orders within two days of receiving them. Smart Products submits its orders directly to the supplier through a web interface, so its lead time is the supplier’s two-day turnaround time. Each order costs Smart Products about $500 to place, while carrying costs are about $60 per unit per year. The company seeks to maintain a five-day usage level in a safety stock. Assume a 365-day year.

33. What is Smart Product’s economic order quantity (EOQ) for this input?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

34. What is Smart Products’ carrying cost at the EOQ?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

35. At what inventory level of this input should Smart EOQ reorder?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

36. Which would improve Smart Product’s total cost at the EOQ more: a 15% reduction in carrying costs or a 10% reduction in order costs?

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

37. Refer to Smart Products. If management determines that a four-day safety stock is appropriate for this input, what is the new reorder point?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 38 to 40.

Sawtooth Industries uses an EOQ model to manage its inventory investment. The company uses about 25 000 moulded plastic assemblies each year. Order costs for these are $150 per order, and carrying costs are about $250 per unit per year. Assume a 365-day year.

38. What is Sawtooth Industries’ EOQ for these parts?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

39. Based on the EOQ, how many orders will Sawtooth place each year?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

40. What is Sawtooth’s total cost based on the EOQ?

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 41 to 47.

Big Thompson Industries (BTI) currently produces and sells 50 000 units of a motor relay used in high-end electronics. All sales are on credit for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3 000 000 in fixed costs per year. With current credit standards, BTI’s average collection period is 30 days. Managers are considering a relaxation in standards and forecast a 6% increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5% to 2.5% of sales. Investments of this type are expected to earn a 14% return. Assume a 365-day year.

41. With the current standards, what is BTI’s average investment in receivables?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

42. What is BTI’s contribution margin?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

43. Refer to Big Thompson Industries. What is the forecasted increase in profits from increased sales if credit standards are changed?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

44. What will be BTI’s average investment in accounts receivable under the new standards?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

45. Refer to Big Thompson Industries. What is the cost of the marginal investment in accounts receivable?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

46. Refer to Big Thompson Industries. What is the marginal cost of bad debt expense if the new standards are adopted?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

47. Should BTI relax its credit standards?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

48. A companies’ operating cycle measures the time that elapses:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 48 to 53.

The Polyana Shoe Store had sales last year of $50 000 000 based upon a cost of goods sold of $40 000 000. Polyana also has inventory, accounts receivable and accounts payable of $5 000 000, $7 000 000 and $9 000 000, respectively. Assume a 365-day year.

49. What is Polyana’s average age of inventory?

5 000 000/(40 000 000/365) = 45.625 days

PTS: 1 DIF: M

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

50. What is Polyana’s average collection period?

7 000 000/(50 000 000/365) = 51.1 days

PTS: 1 DIF: M

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

51. What is Polyana’s average payment period?

9 000 000/(40 000 000/365) = 82.1 days

PTS: 1 DIF: M

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

52. What is Polyana’s cash conversion cycle period?

CCC = AAI + ACP – APP

= [5 000 000/(40 000 000/365)] + [7 000 000/(50 000 000/365)] – [9 000 000/(40 000 000/365)]

= 45.625 + 51.1 – 82.125 = 14.60

PTS: 1 DIF: H

REF: 18.1 The Cash Conversion Cycle NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

53. If Polyana increased its gross profit margin during the previous year without changing its accounts receivable level, then what would have happened to Polyana’s cash conversion cycle?

Sales increase, but the cost of goods sold remains the same. ACP would then decrease, which would cause the CCC to decrease.

PTS: 1 DIF: H

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

54. A company is trying to determine the optimum level for an operating asset that will have an effect on financing costs as well as lost sales cost. The optimum level is that which:

REF: 18.2 Cost Tradeoffs in Short-term Financial Management

NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

55. If marketing and production costs are ignored, a company can increase inventory management efficiency by:

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

56. Franconia Notch Blowers annually sells 10 000 snow blowers per year. It costs Franconia $75 each time it processes an order for snow blowers, and the carrying cost for each blower is $50 per year. What is the optimum order size for Franconia?

EOQ = (2SO/C)^1/2 = (2 × 75 × 10 000/50)^1/2 = 173.21

PTS: 1 DIF: M

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

57. Shoe Club expects to sell 10 000 shoes per month next year. It costs Shoe Club $15 every time it processes a shoe order and the cost of holding a pair of shoes is about $3 per year. What is the optimum number of pairs of shoes for Shoe Club to order?

EOQ = (2SO/C)^1/2 = [2 × 15 × (10 000 × 12)/3]^1/2 = 1095.45

PTS: 1 DIF: M

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

58. The Good Espresso Machine, Inc. sells 5110 machines per year. If it typically takes 5 days to process and receive an order, then at what level of inventory should the company place an order?

5110/365 = 14 machines sold per day

14 machines sold per day × 5 days = 70 units

PTS: 1 DIF: M

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

59. You are consulting for a company that anticipates that it will sell 730 000 units this year. The company’s policy is to begin to process a new order when the inventory level is just 10 000 units. What does that imply about the amount of time it take to process and receive an order?

730 000/365 = 2000 units sold per day

Reorder point: 10 000 units ===> 5 days of inventory left at order point

PTS: 1 DIF: H

REF: 18.3 Inventory Management NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

60. An inventory system that is premised on materials arriving exactly when they are needed for production is called:

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

61. The outright sale of a company’s receivables to a third party is called:

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

62. The part of credit policy that dictates how delinquent accounts should be handled is called:

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

63. Companies that tend to do extensive credit checks on clients before offering credit are more likely to be companies with:

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

64. Which of the following is not one of the five Cs of credit?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: acquire knowledge of financial analysis and cash flows

Use the following information to answer questions 65 to 70.

Competitive Mesh Shirts is considering a plan to ease its credit terms in order to generate greater revenues. Last year, Competitive had sales of 1 000 000 units at a price and variable cost of $20 and $15, respectively. Its current average collection period is 20 days, its percentage of bad debt expense is 2% and its required return on investment is 10%. If Competitive were to ease its credit terms, the company anticipates that its sales would increase to 1 200 000 units without a change in price or variable costs. However, the average collection period is expected to increase to 30 days and bad debt expense is expected to increase to 3%. Assume a 365-day year.

65. What is Competitive’s current average investment in accounts receivable?

(1 000 000 × 15)/(365/20) = 821 917.81

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

66. What is Competitive’s expected increase in bad debt expense?

(1 200 000 × 20 × 0.03) – (1 000 000 × 20 × 0.02) = 320 000

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

67. What will be Competitive’s cost of marginal investment in accounts receivable?

Current level of A/R investment = (1 000 000 × 15)/(365/20) = 821 917.81

Future level of A/R investment = (1 200 000 × 15)/(365/30) = 1 479 452.84

Cost of investment = (1 479 452.84 – 821 917.81) × 0.1= 65 753.50

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

68. What is Competitive’s future average investment in accounts receivable?

(1 200 000 × 15)/(365/30) = 1 479 452.84

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

69. What is Competitive’s marginal profit from increased sales?

200 000 × 5 = 1 000 000

PTS: 1 DIF: M

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

70. What is Competitive’s net profit for the credit decision at hand?

Current level of AR investment = (1 000 000 × 15)/(365/20) = 821 917.81

Future level of AR investment = (1 200 000 × 15)/(365/30) = 1 479 452.84

Cost of investment = (1 479 452.84 – 821 917.81) × 0.1= 65 753.50

Bad debt expense = (1 200 000 × 20 × 0.03) – (1 000 000 × 20 × 0.02) = 320 000

Marginal profit from increased sales = 200 000 × 5 = 1 000 000

Net profit = 1 000 000 – 65 753.50 – 320 000 = 614 246.50

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

71. A positive cash conversion cycle means that:

REF: 18.1 The Cash Conversion Cycle NAT: Reflective thinking

LOC: understand shares and bonds

72. In the ABC system, inventory is categorised based upon:

REF: 18.3 Inventory Management NAT: Reflective thinking

LOC: understand shares and bonds

73. What is the name of the procedure that applies statistically derived weights for key financial and credit characteristics to predict whether a credit applicant with specific scores for each characteristic will pay the requested credit in a timely fashion?

REF: 18.4 Accounts Receivable Standards and Terms NAT: Reflective thinking

LOC: understand shares and bonds

74. The procedure used by a company to collect overdue or delinquent accounts receivable is called:

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

NAT: Reflective thinking

LOC: understand shares and bonds

75. The schedule that indicates the portions of the total accounts receivable balance that have been outstanding for specified periods is known as:

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

NAT: Reflective thinking

LOC: understand shares and bonds

76. What is the normal timing in which a company’s customers pay their accounts, expressed as the percentage of monthly sales collected in each month following the sale?

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

NAT: Reflective thinking

LOC: understand shares and bonds

77. What is the process through which customers’ payments are posted to their accounts and the outstanding invoices are cleared as paid?

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

NAT: Reflective thinking

LOC: understand shares and bonds

78. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What the current average investment in accounts receivable?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

79. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What is the increase in bad debt expense?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

80. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What is the new investment in accounts receivable?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

81. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What is the marginal profit from increased sales?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

82. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What is the cost associated with the increased investment in accounts receivable?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

83. Emma International is considering easing credit standards to increase sales and potentially profits. Currently, the company sells 500 000 units at a sales price of $22 per unit and variable cost of $13 per unit. The average collection period is 25 days and the bad debt expense is 2% of sales. The required return on investment is 12%. If credit standards are eased, sales will increase to 600 000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3%. All else will remain the same. What is the profit associated with easing credit standards?

PTS: 1 DIF: H

REF: 18.4 Accounts Receivable Standards and Terms NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

SHORT ANSWER

1. What are the three main components of the cash conversion cycle?

PTS: 1 DIF: E

REF: 18.1 The Cash Conversion Cycle

2. List the five Cs of credit.

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms

3. What should be the financial manager’s focus when managing short-term activities?

PTS: 1 DIF: E

REF: 18.1 The Cash Conversion Cycle

4. What is the objective of managing accounts receivable?

PTS: 1 DIF: E

REF: 18.4 Accounts Receivable Standards and Terms

5. What are the three popular credit monitoring techniques?

PTS: 1 DIF: E

REF: 18.5 Collecting, Monitoring and Applying Cash to Receivables

6. What is an operating cycle?

PTS: 1 DIF: EREF: 18.1 The Cash Conversion Cycle