Chapter 07 – Current Asset Management
118. Waldron Inc. is considering selling to a group of new customers that will bring in credit
sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts
receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable.
What is the return on investment?
Chapter 07 – Current Asset Management
119. Modos Company has deposited $3,500 in checks received from customers. It has written
$1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its
customer’s checks have cleared but only $600 of its own, calculate its float.
120. Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm
estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is
the optimum order size?
Chapter 07 – Current Asset Management
121. Assuming that we can earn a 10% return on accounts receivable, which of the following
actions to finance an increase in our accounts receivable balance would be optimal?
122. If a company can implement cash management systems and save 3 days by reducing
remittance time and 1 day by increasing disbursement time based on $2,000,000 in average
daily remittances and $2,500,000 in average daily disbursements and their return on freed up
funds is 10%, what is the max they should spend on the system?
Chapter 07 – Current Asset Management
123. All of the following are methods of controlling receivables except:
124. Level production offers all of the following benefits except:
Chapter 07 – Current Asset Management
125. We expect that we can receive annual incremental income after taxes of $25,000 which
includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R
we should be willing to assume if our firm’s minimum required after-tax return is 8%?
126. All of the following are examples of carrying costs except:
Chapter 07 – Current Asset Management
127. The inventory decision model provides which type of information
128. Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order,
carrying costs of $1.00 per unit and desires to keep 100 units in safety stock. Assuming level
production, what is their average inventory?
Chapter 07 – Current Asset Management
129. Match the following with the items below:
1. Automated
The difference between the corporation’s recorded
cash balance on its books and the amount credited to the
2. bankers’
Is offered by banks and savings and loans for the
deposit of funds at a given interest rate over a specified
Intermediate term obligations of the federal
4. certificates of
A credit-rating agency that publishes information on
Short-term obligations of the federal government with
A procedure used to expedite cash flows to a business
7. compensating
An unsecured promissory note issued by large
A study of the positive and negative results that can
10. commercial
U.S. dollars held on deposit by foreign banks and
Transfers information between one financial
12. cost-benefit
Banks typically require that this cash balance be held
Chapter 07 – Current Asset Management
130. Match the following with the items below:
Allows the firm to minimize the total ordering and
2. electronic funds
A system in which funds are moved between banks
and other participating corporations by use of the
3. conomic ordering
An unsecured promissory note issued by large
4. average collection
Analyzing accounts based on the amount of time they
5. aging of accounts
These assets reduce the risk of losing business to
6. money market
The repayment provisions associated with a credit
The amount of time that a normal account receivable
9. passbook savings
Because it pays the lowest interest rate at a bank, this
10. Just In Time
Due to federal deregulation, commercial banks,
savings and loans, and credit unions now are allowed to
offer these investment opportunities modeled from
11. commercial
The various factors that influence a company’s ability
A lean total production concept that produces quality
products that minimize the level of inventory by
13. money market
A process of generating cash which, although it
Investing opportunity which allows small investors to
place funds into short-term securities which they may not
be able to buy directly because of the high funds
Chapter 07 – Current Asset Management
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131. Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated
circuits to manufacturers of telecommunications devices. The firm is currently debating
whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $3
million in sales if it enters this market, it also knows that 15% of its sales will ultimately be
uncollectible. In addition, collection costs will be 3% on all new sales and the firm’s
production and selling costs are 80% of sales. Mountain Home’s tax rate is 30%.
a) Calculate Mountain Home’s additional net income from the new sales.
b) If Mountain Home can turn its receivables over 4 times per year, what will its additional
investment in accounts receivable be and what will the firm earn as an after-tax return on that
investment?
c) Mountain Home management requires that any new project earn a minimum of 10% return
on investment. Should the firm enter the car-telephone manufacturer market?
Chapter 07 – Current Asset Management
132. Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods.
Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that
although selling leather to U.S. auto manufacturers will bring additional annual sales of
$1,000,000, a high 15% of those accounts will be uncollectible. The cost of conditioning and
selling the leather is 70% of sales. Tanner’s tax rate is 30%.
a). Calculate Tanner’s incremental net income on the new sales.
b). Assume Tanner has a receivables turnover of 4. Calculate Tanner’s incremental accounts
receivable investment and after-tax return on that investment.
c). Tanner’s minimum required ROI is 15%. Should Tanner expand into the auto market?.
Chapter 07 – Current Asset Management
133. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager,
Wanda LaRue, currently orders 10,000 units four times each year to handle annual demand of
40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a
safety stock of 200 units.
a) What is Novelty Gifts’ current total annual inventory cost?
b) Calculate the economic ordering quantity (EOQ).
c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units.
d) Calculate total annual inventory cost under EOQ. How does this compare to her current
inventory costs?
Chapter 07 – Current Asset Management
134. The Milling Corp. has developed a new type of widget. The local distributor expects to
increase his sales by 25% over the past year due to this new development. Last year’s sales
were $150,000 at a selling price of $100 per unit. A safety stock of 35 units has eliminated
stockouts. The manager would like to cut costs as much as possible and comes to you for
advice.
a) What is the economic order quantity?
b) What is the amount of average inventory?
c) How many orders will be made per year?
d) What is the total cost of this inventory decision?
Chapter 07 – Current Asset Management
135. Linkup Systems, which provides investors with computerized information about stock
prices, is considering the establishment of a lockbox system with its bank. The firm receives
daily collections of $2.0 million, and could earn 6% on any funds freed up through faster
collections. If the lockbox system can save 2 days in the collection process, and the firm’s
bankers will charge $200,000 per year to operate the lockbox system, is it worth it to establish
the system?