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Working Capital Management

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A draft./The use of a draft delays a cash disbursement and increases payable float.
CPA-03522: A working capital technique, which delays the outflow of cash, is:
$10,000/$10,000. Float is the difference between the balance of checks outstanding, which have not cleared the bank and deposits made but which have not yet cleared the bank here:
$10,000/day checks drawn but not cleared × 5 days = $ 50,000
Less $10,000/day checks received but not cleared × 4 days = (40,000)
Positive "float" $ 10,000
CPA-03519: Assume that each day a company writes and receives checks totaling $10,000. If it takes five days for the checks to clear and be deducted from the company's account, and only four days for the deposits to clear, what is the float?
Refinancing of accounts payable with a two-year note payable./Working capital (WC) increases only if current assets are increased or current liabilities are decreased. Exchanging accounts payable (current liability) for a two-year note payable (long-term liability) would decrease current liabilities and increase working capital.
CPA-03528: Which one of the following would increase the working capital of a firm?
Current level of inventory./The current level of inventory has no impact on the optimal level of inventory.
CPA-03525: The optimal level of inventory would be affected by all of the following, except the:
1. The time required to receive inventory.
2. The cost per unit of inventory, which will have a direct impact on inventory carrying costs.
3. The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels.
The optimal level of inventory is affected by:
$(6,000)/A company's decision to commit to a lockbox plan is an example of marginal analysis. In other words, do the marginal benefits exceed the marginal costs of the plan?
Marginal revenue equals:
Increase cash $150,000 per day
Receipts available × 4 days
For investment $600,000
Can be invested for yr:
at 4% x .04
MR $24,000
Less: marginal costs
Mo. Lockbox fee x 12
$2,500 x 12 = (30,000)
Loss on plan ($6,000)
CPA-03516: A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:
0.78/The acid-test or quick ratio is the ratio of the most liquid assets to current liabilities and provides an even more rigorous test of liquidity than the current ratio. The quick ratio excludes less liquid current assets from the numerator (e.g., prepaid expenses and inventory) and includes only such line items as cash and accounts receivable as provided in the problem. The quick ratio would be computed as follows:
Cash $ 100
Accounts receivable 600
Quick assets $ 700
Current liabilities ÷ 900
Quick ratio 0.78
CPA-07106: A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?
18/Days' sales = Ending accounts receivable / Average daily sales
That formula will not work in this case because the necessary information is not provided. However, enough information about payments is provided so that the total days' sales can be determined on a weighted average basis. In this question, nobody pays before the 10th day and 60% of the customers pay on the 10th day, so there are 10 × 0.60, or 6 day's sales there. The other 40% of the customers pay on the 30th day so there are 30 × 0.40, or 12 day's sales there. The total is 18 days sales.
CPA-05314: Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of Amicable's customers take the 2% discount and pay on day 10. The remainder of Amicable's customers pay on day 30. How many days' sales are in Amicable's accounts receivable?
No, producing a loss of $20,000 per year./No, do not use the lock-box system, which produces a loss of $20,000 per year.
Lock-box cost $ 80,000
Investment income 60,000*
Loss per year $ 20,000
* 60,000 = (3 days / 360 days) × $90,000,000 × .08
CPA-04038: Foster Inc. is considering implementing a lock-box collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lock-box system will reduce collection time by 3 days. If Foster can invest funds at 8 percent, should it use the lock-box system? Assume a 360-day year.
3%/The market rate of interest on a one year U.S. Treasury bill is comprised of the risk free rate of return and an inflation premium. The fact pattern gives this information as follows:
Risk free rate of interest 2%
Inflation premium 1%
Market rate of interest on one-year T-bill 3%
CPA-07101: The following information is available on market interest rates:
The risk-free rate of interest 2%
Inflation premium 1%
Default risk premium 3%
Liquidity premium 2%
Maturity risk premium 1%
What is the market rate of interest on a one-year U.S. Treasury bill?
4/1. Computation of cost of goods sold as follows:
Beginning inventory $ 17,000
+ Purchases 56,000
Less: Ending inventory (13,000)
Cost of goods sold $ 60,000
2. Computation of average inventory:
(Beginning inventory + Ending inventory) / 2 = Average inventory
(17,000 + 13,000) / 2 = 15,000
3. Computation of inventory turnover:
Cost of Goods Sold / Average inventory = Inventory Turnover
$60,000 / 15,000 = 4
CPA-07102: The following information was taken from the income statement of Hadley Co.:
Beginning inventory $ 17,000
Purchases 56,000
Ending inventory 13,000
What is Hadley Co.'s inventory turnover?
Inventory turnover: Increase
Inventory percentage: Decrease
CPA-03891: Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell's inventory turnover and inventory as a percentage of total assets reported on Bell's balance sheet?
smaller level of inventory when compared to traditional systems. Inventory turnover (cost of goods sold divided by average inventory) increases with a switch to JIT, and inventory as a percentage of total assets decreases.
In a just-in-time system, products are produced just-in-time to be sold. Therefore, JIT systems maintain a much
Increase in the ratio of current assets to noncurrent assets./An increase in the ratio of current assets to non-current assets would be indicative of an increasingly conservative working capital policy. With no other information, an increase in current assets would indicate that a growing percentage of current assets are financed by non current liabilities and that, nominally, the absolute amount of working capital and the current ratio is improving.
CPA-03534: As a company becomes more conservative with respect to working capital policy, it would tend to have a (n):
long-term assets, permanent current assets, and temporary current assets are funded by long-term financing.
RULE: Working capital policy is deemed to be more conservative as an increasing portion of an organization's:
Days sales outstanding./Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are outstanding, the longer the receivables are outstanding.
CPA-05262: Which of the following ratios is appropriate for the evaluation of accounts receivable?
Increased by $170,000./Net working capital is the difference between current assets and current liabilities. Because current assets went up $120,000 and current liabilities down by $50,000, the net effect is an increase in net working capital of $170,000.
Before change Change After Change
Currect assets $ 500,000 $ 120,000 $ 620,000
Current liabilities 300,000 (50,000) 250,000
Net working capital $ 200,000 $ 370,000
CPA-03531: During Year 2, Mason Company's current assets increased by $120,000, current liabilities decreased by $50,000 and net working capital:
24.74 percent./The formula for computing the cost of credit discounts is:
Cost of credit discount
= 360 (Total pay period − Discount period) ×
Discount % (100% − Discount %)
=[360 ÷ (60 − 15)] × [3% ÷ (100% − 3%)]
=8 × .0309
=24.7%
CPA-03538: Quantree Company is quoted credit terms of 3/15, net 60 (using a 360-day year). The effective cost of not taking this discount and paying on day 60 is (rounded to nearest hundredth):
Liquidity./A company's average collection period is used to evaluate the liquidity of the firm through the calculation of the cash conversion cycle. Liquidity measurements focus on the ability of the company to meet obligations as they come due.
CPA-06650: Green, Inc., a financial investment-consulting firm, was engaged by Maple Corp. to provide technical support for making investment decisions. Maple, a manufacturer of ceramic tiles, was in the process of buying Bay, Inc., its prime competitor. Green's financial analyst made an independent detailed analysis of Bay's average collection period to determine which of the following?
Materials requirements planning.
CPA-07107: Which of the following inventory management techniques focuses on a set of procedures to determine inventory levels for demand-dependent inventory types such as work-in-process and raw materials?
projects and plans inventory levels in order to control the usage of raw materials in the production process. MRP primarily applies to work in process and raw materials.
Materials requirements planning (MRP) is an inventory management technique that:
Variability of lead-time increases./If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase.
CPA-03536: In inventory management, the safety stock will tend to increase if the:
Inventory Conversion Period: Decrease
ReceivablesCollection Period: Decrease
Payables Deferral Period: Increase
CPA-07028: The cash conversion cycle of an organization would improve under which combination of performance results (measured in days) shown below:
Inventory Conversion Period
Receivables Collection Period
Payables Deferral Period
collected faster from sales of product and speedy collections from accounts receivable. The increasing deferral period on payables indicates that the cash disbursements are being held as long as possible. The cash conversion cycle is therefore becoming shorter and improving. The formula for the cash conversion cycle is as follows:
Cash Conversion Cycle = Inventory conversion period+Receivables collection period−Payablesdeferral period
Decreasing inventory conversion and accounts receivable collection periods indicates that cash is being:
Carrying costs./A decrease in carrying costs would increase the Economic Order Quantity (EOQ).
CPA-03481: The Stewart Co. uses the Economic Order Quantity (EOQ) model for inventory management. A decrease in which one of the following variables would increase the EOQ?
EOQ=Order size
S=Annual Sales quantity in units
O=Cost per purchase Order
C=Annual cost of Carrying one unit in stock for one year
Economic Order Quantity Equation: EOQ = Sq Rt [2SO/C]
16/The average collection period represents the weighted average of the periods that accounts receivable are outstanding and is computed as follows:
Customers paying on day 10 x 70% =7
Customers paying on day 30 x 30% =9
Average collection period in days 16
CPA-05569: Super Sets, Inc. manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent of Super Set customers take discounts and pay on day 10, while the remaining 30% pay on day 30. What is the average collection period in days?
greatest risk of being unable to meet the firm's maturing obligations.
The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the:
smallest risk of being unable to meet maturing obligations.
The use of long-term debt produces the:
Anticipates orders at the point where carrying costs are nearest to restocking costs. The objective of EOQ is to minimize total inventory costs.
Economic order quantity:
Pneumonic for EOQ:
E - Order Size (EOQ)
S - Annual Sales (in units)
O - Cost per Purchase Order (primarily production set-up costs)
C - Carrying cost per unit.
ESOC:
Models were developed to reduce the lag time between inventory arrival and inventory use.
JIT:
Method of determining inventory requirements when a given number of units is needed. The method is used to create precise schedules of which items will be needed and what times they will be needed.
MRP (Materials requirements planning):
Prevents either oversupply or interruption of the entire manufacturing process resulting from the lack of a component.
Kanban inventory:
Demand is known. Annual sales volumes is a crucial variable in the EOQ formula.
EOQ assumes:
Cash inflows. Achieves this by having a bank receive payments from a company's customers directly, via mailboxes to which the bank has access. Payments that arrive in these mailboxes are deposited into the company's account immediately.
A lockbox system expedites:
collection type float.
Lockbox systems relate to what kind of float?
Cash discount period. Cash discounts would be considered as a component of collections and payables defferals.
The cash conversion cycle does not include the:
Inventory Conversion+Receivables Collection Period-Payables Deferral Perio
Cash conversion cycle:
Method by which a single bank is designated as a central bank as a means of controlling receipts.
Concentration banking
Generally relates to expediting deposits over a specific group of transactions. The technique arranges for direct mailing of customers' remittances to a bank's post office box and subsequent deposit.
Lockbox system:
Represents an account that maintains a zero balance. Zero balance accounts are accompanied by a master or parent account that serves to fund any negative balance and is designed to maximize the availability of idle cash, not control receipts.
Zero balance banking:
Minimum balances maintained by a bank customer in leau of bank charges. Amounts may serve to eliminate fees or to effectively collateralize credit lines, not to establish better controls over cash receipts.
Compensating balances:
(Cash+Marketable Securities+Receivables)/Current Liabilities
Quick Ratio (Acid test):
Sales/Accounts Receivable
The accounts receivable turnover ratio is:
improve (increase) the turnover ratio.
A reduction in accounts receivable would serve to:
reduce the amount of accounts receivable (indicating more rapid collections) thereby increasing (improving) the company's accounts receivable turnover ratio.
Factoring (Selling) receivables would serve to:
sales or accounts receivable. There would be no improvement in the accounts receivable turnover ratio.
Pledging accounts receivable does not impact:
Current assets divided by current liabilities. The sale of land would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio. Furthermore, the sale of land at a loss would decrease net profit.
The current ratio is:
increase the quick ratio. The reduction of inventory values and recording a loss would have no impact on quick assets. The addition of cash, however, would increase cash with no impact on current liabilities. The quick ratio would improve.
Selling obsolete inventory at a loss would:
increase in the contra-account, allowance for doubtful accounts. When this occurs, the company's net realizable value on outstanding accounts receivables declines, lowering its current assets.
A company that records bad debt expense for a period also recognizes an:
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