Chapter 18 - Dropbox 5.4

Problem 1: Changes in the Cash Account

List and indicate the impact of each of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs:

a) A dividend is paid with funds received from a sale of debt.                                                                                     b) Real estate is purchased and paid for with short-term debt.                                                                                           c) Inventory is bought on credit.                                                                                                                                            d) A short-term bank loan is repaid.                                                                                                                                                                                    e) Next year's taxes are prepaid.                                                                                                                             f) Preferred stock is redeemed.                                                                                                                                                   g) Sales are made on credit.                                                                                                                                                                    h) Interest on long-term debt is paid.                                                                                                                                                                 i) Payments for previous sales are collected.                                                                                                                                                           j) The accounts payable balance is reduced.                                                                                                                                                k) A dividend is paid.                                                                                                                                         l) Production supplies are purchased and paid for with a short-term note.                                                                                                                                                  m) Utility bills are paid.                                                                                                                                         n) Cash is paid for raw materials purchased for inventory.                                                                                                                                                                             o) Marketable securities are sold.

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Chapter 18 - Dropbox 5.4

Problem 2: Calculating Cash Collections

The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:

Q1

Q2

Q3

Q4

Sales

$820

$850

$930

$1,010

Accounts Receivable at the beginning of the year are $345.

a) Calculate cash collections in each quarter if the collection period is 45 days.                                                                                               b) Calculate cash collections in each quarter if the collection period is 60 days.                                                                                                                         c) Calculate cash collections in each quarter if the collection period is 30 days.

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Chapter 18 - Dropbox 5.4

Problem 3: Calculating Cycles

Consider the following financial statement information for the Ayala Corporation:

Item

Beginning

Ending

Inventory

$10,583

$13,685

Accounts Receivable

$5,130

$5,690

Accounts Payable

$7,205

$8,105

Credit Sales for this period were $127,382, and the Cost of Goods Sold was $76,157.

a) Calculate the Operating Cycle.                                                                                                                                                           b) Calculate the Cash Cycle.                                                                                                                                    c) How would you interpret your answer?

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Chapter 20 - Dropbox 5.4

Problem 1: Cash Discounts

You place an order for 250 units of inventory at a price of $130 per unit.  The supplier offers terms of 1/10 net 30.

a) How long do you have to pay before the account is overdue?  If you take the full period to pay, how much should you remit?                                                                                                                                                           b) What is the discount being offered, in percentage terms?  How quickly must you pay, in days, to get the discount?  If you do take the discount, how much should you remit?                                                                                                                                    c) If you don't take the discount, how much interest are you paying implicitly, in dollars?  How may days' credit are you effectively receiving?

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Chapter 20 - Dropbox 5.4

Problem 2: Evaluating Credit Policy

Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry.  A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy.  The variable cost is $1.6 million per unit, and the credit price is $1.725 million each.  Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected.  The required return is 1.8 percent per period.

a) Assuming that this is a one-time order, should it be filled?  The customer will not buy if credit is not extended.                                                                                                                                                                                        b) What is the break-even probability of default in part (a)?                                                                                                                                    c) Suppose that customers who don't default become repeat customers and place the same order every period forever.  Further assume that repeat customers never default.  Should the order be filled?  What is the break-even probability of default?                                                                                                                 d) Describe in general terms why credit terms will be more liberal when repeat orders are a possibility.

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Chapter 20 - Dropbox 5.4

Problem 3: Economic Order Quantity (EOQ)

The Trektronics store begins each week with 450 phasers in stock.  This stock is depleted each week and reordered.  The carrying cost per phaser is $41 per year and the fixed order cost is $130.

a) What is the total carrying cost?                                                                                                                                                           b) What is the total restocking (ordering) cost?                                                                                                                                    c) Should Trektonics increase or decrease its order size?                                                                                                        d) Calculate the Economic Order Quantity.                                                                                                                         e) Describe the optional inventory policy in terms of order size and order frequency.

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