Reference no: EM132499816

Inventory Management

Question 1: Williams & Sons last year reported sales of $74 million, cost of goods sold (COGS) of $60 million, and an inventory turnover ratio of 5. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 6 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $1.23 million should be entered as 1,230,000,000. Round your answer to the nearest dollar.

Receivables Investment

Question 2: Medwig Corporation has a DSO of 26 days. The company averages $9,250 in sales each day (all customers take credit). What is the company's average accounts receivable? Assume a 365-day year. Round your answer to the nearest dollar.

Cost of Trade Credit

Question 3: What are the nominal and effective costs of trade credit under the credit terms of 4/10, net 40? Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places.

Nominal cost of trade credit:

Effective cost of trade credit:

Cost of Trade Credit

Question 4: A large retailer obtains merchandise under the credit terms of 1/20, net 35, but routinely takes 55 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places.

Accounts Payable

Question 5: A chain of appliance stores, APP Corporation, purchases inventory with a net price of $700,000 each day. The company purchases the inventory under the credit terms of 1/15, net 40. APP always takes the discount but takes the full 15 days to pay its bills. What is the average accounts payable for APP? Round your answer to the nearest dollar.

Receivables Investment

Question 6: Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,000,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases. Assume a 365-day year.

Question 6.1: What is the days sales outstanding? Do not round intermediate calculations. Round your answer to the nearest whole number.

Question 6.2: What is the average amount of receivables? Do not round intermediate calculations. Round your answer to the nearest dollar.

Question 6.3: What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 45th day? Do not round intermediate calculations. Round your answer to the nearest dollar.

Cost of Trade Credit

Question 7: Calculate the nominal annual cost of trade credit under each of the following terms. Assume a 365-day year. Do not round intermediate calculations. Round your answers to two decimal places.

1/15, net 30.:
2/10, net 55.:
3/10, net 50.:
2/10, net 50.:
2/15, net 45.:

Cash Budgeting

Question 8: Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to create cash budget for the critical period around Christmas, when needs will be especially high.

• Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $1,700 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $100,000.

                                      Sales                                   Purchases

December                 $120,000                          $25,000

January                   44,000                               25,000

February                 52,000                                 25,000

Question 9: make a cash budget for December, January, and February. Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.
Collections and Purchases:

December January February

Sales (Collections):

Purchases:

Payments for purchases:

Salaries:

Rent:

Taxes:

Total payments:

Cash at start of forecast:

Net cash flow:

Cumulative cash balance:

Target cash balance:

Surplus cash or loans needed:

Question 10: Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.) Do not round intermediate calculations. Round your answer to the nearest dollar.