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Exam 18: Current Asset Management

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Question 61

True/False

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For a non-growth firm, it is possible to increase the percentage of sales that are made on credit sales and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

A) True
B) False

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Question 62

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Which of the following statements is correct?

A) If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.
B) It is possible for a firm to overstate profits by offering very lenient credit terms that encourage additional sales to financially weak firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.
C) Firms use seasonal dating primarily to decrease their DSO.
D) Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1, the customer can take the discount up until March 15, but must pay the net invoice amount by April 1.

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

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Question 63

Multiple Choice

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Which of the following statements is NOT correct?

Scenario Aberwald 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 costs is equal to 20% of the purchase price. (Assume a 360-day year.) -Refer to Scenario Aberwald. 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?

Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.

Scenario BC Prints BC 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 are the incremental pre-tax profits from this proposal?

A JIT system is designed to stretch accounts payable as long as possible.

Seligstine Inc.'s DSO was 31 days in March, and 45 days in April. Which of the following is the most likely?

Which circumstance would cause average inventory holdings to decrease, other things held constant?

Which statement best describes float?

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

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals, etc.

Providing much higher yields than operating assets, marketable securities are often held in sizable amounts.

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and that the percentage of past due accounts is minimal.