Ray now asks you to examine his company's credit policy to determine whether changes are needed. One of his employees, who graduated recently with a finance major, has recommended that the credit terms be changed from 2/10, net 30, to 3/20, net 45, and that both the credit standards and the collection policy be relaxed. According to the employee, such a change would cause sales to increase from $3.6 million to $4.0 million.

Currently, 62.5 percent of SSP's customers pay on Day 10 of the billing cycle and take the discount, 32 percent pay on Day 30, and 5.5 percent pay (on average) on Day 60. If the firm adopts the new credit policy, Ray thinks that 72.5 percent of customers would take the discount, 10 percent would pay on Day 45, and 17.5 percent would pay late, on Day 90. Bad debt losses for both policies are expected to be trivial.

SSP's variable operating costs are currently 75 percent of sales, its cost of funds is 10 percent, and its marginal tax rate is 40 percent. None of these factors would change as a result of a credit policy change. All cash payments associated with the production and sale of products (including credit costs) are made on the day the products are sold.

To help him decide whether to adopt the new policy, Ray has asked you to answer the question below.

Should SSP make the change?

Ray now asks you to examine his company's credit policy to determine whether changes are needed. One of his employees, who graduated recently with a finance major, has recommended that the credit terms be changed from 2/10, net 30, to 3/20, net 45, and that both the credit standards and the collection policy be relaxed. According to the employee, such a change would cause sales to increase from $3.6 million to $4.0 million.

Currently, 62.5 percent of SSP's customers pay on Day 10 of the billing cycle and take the discount, 32 percent pay on Day 30, and 5.5 percent pay (on average) on Day 60. If the firm adopts the new credit policy, Ray thinks that 72.5 percent of customers would take the discount, 10 percent would pay on Day 45, and 17.5 percent would pay late, on Day 90. Bad debt losses for both policies are expected to be trivial.

SSP's variable operating costs are currently 75 percent of sales, its cost of funds is 10 percent, and its marginal tax rate is 40 percent. None of these factors would change as a result of a credit policy change. All cash payments associated with the production and sale of products (including credit costs) are made on the day the products are sold.

To help him decide whether to adopt the new policy, Ray has asked you to answer the question below.

What variables make up a firm's credit policy? In what direction would each be changed if the credit policy were tightened? How would each variable tend to affect sales, the level of receivables, and bad debt losses?

Small Fry Pools generally carries an amount of receivables equal to $80,000, and its annual credit sales equal $2.4 million. What are Small Fry's (a) receivables turnover and (b) receivables collection period (DSO)?

What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What factors should a firm consider in building its marketable securities portfolio? What are some securities that should be held and some that should not be held?

You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available.

$$\begin{array} {lrrrrr} \text{Inventory, July 1}& \hspace{10pt}\text{\$\hspace{10pt}38,000}&\\ \text{Purchases-goods placed in stock July 1-15}& \hspace{10pt}\text{85,000}&\\ \text{Sales revenue-goods delivered to customers (gross)}& \text{116,000}&\\ \text{Sales returns-goods returned to stock}& \hspace{10pt}\text{4,000}&\\ \end{array}$$

Your client reports that the goods on hand on July 16 cost $30,500, but you determine that this figure includes goods of$6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan's insurance covers only goods owned.

Compute the claim against the insurance company.

Castlevania Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following.

$$\begin{array} {lrlr} \text{Beginning inventory} & \$170,000 & \text{Sales} & \$650,000\\ \text{Purchases for the year} & \text{450,000} & \text{Sales returns} & \text{24,000}\\ \text{Purchase returns} & \text{30,000} & \text{Rate of gross profit on net sales} & \text{30\\\%}\\ \end{array}$$

Merchandise with a selling price of $21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of$15,000 had a net realizable value of $5,300.

Required

Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation's books disclosed the following.

$$\begin{array}{lrrllrrr} \text{Beginning inventory}&&\$170,000&\hspace{10pt}&\text{Sales revenue}&&\$650,000\\ \text{Purchases for the year}&&390,000&\hspace{10pt}&\text{Sales returns}&&24,000\\ \text{Purchase returns}&&30,000&\hspace{10pt}&\text{Rate of gross profit on net sales}&&40\%\\ \end{array}$$

Merchandise with a selling price of $21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of$15,000 had a net realizable value of $5,300.

Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

Why would a firm hold marketable securities?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

How can a firm speed up collections and slow down disbursements?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

You have been going through the store's checkbook and bank balances. In the process, you discovered that SSP, on average, writes checks in the amount of $10,000 each day and that it takes approximately five days for these checks to clear. Also, the firm receives checks in the amount of $10,000 daily, but loses four days while they are being deposited and cleared. What is the firm's disbursement float, collections float, and net float?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

How can a firm synchronize its cash flows, and what good would this effort do?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What are some specific advantages for a firm in holding adequate cash balances?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What is meant by the terms precautionary balance and speculative balance?