CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Inventory conv. period
TYPE: Multiple Choice: Problem
108. Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the
firms against which it benchmarks. The firm’s new CFO believes that the company could reduce its inventory enough to
reduce its ICP to the benchmarks’ average. If this were done, by how much would inventories decline? Use a 365-day
year.
Cost of goods sold =
$85,000
Inventory =
$20,000
Inventory conversion period (ICP) =
85.88
Benchmark inventory conversion period (ICP) =
38.00
a.
b.
c.
d.
e.
e
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Inventory conv. period
TYPE: Multiple Choice: Problem
109. Data on Mertz Co. for the most recent year are shown below, along with the payables deferral period (PDP) for the
firms against which it benchmarks. The firm’s new CFO believes that the company could delay payments enough to
increase its PDP to the benchmarks’ average. If this were done, by how much would payables increase? Use a 365-day
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
year.
Cost of goods sold =
$75,000
Payables =
$5,000
Payables deferral period (PDP) =
24.33
Benchmark payables deferral period =
30.00
a.
$764
b.
$849
c.
$943
d.
$1,048
e.
$1,164
e
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Payables deferral period
TYPE: Multiple Choice: Problem
110. Marshall Inc. recently hired your consulting firm to improve the company’s performance. It has been highly
profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to
determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present
cash conversion cycle?
Average inventory =
$75,000
Annual sales =
$600,000
Annual cost of goods sold =
$360,000
Average accounts receivable =
$160,000
Average accounts payable =
$25,000
a.
120.6 days
b.
126.9 days
c.
133.6 days
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
d.
140.6 days
e.
148.0 days
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
111. Frosty Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm’s cash conversion
cycle?
Annual sales =
$45,000
Annual cost of goods sold =
$31,500
Inventory =
$4,000
Accounts receivable =
$2,000
Accounts payable =
$2,400
a.
25 days
b.
28 days
c.
31 days
d.
35 days
e.
38 days
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
112. Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm’s cash conversion
cycle?
Annual sales =
$45,000
Annual cost of goods sold =
$30,000
Inventory =
$4,500
Accounts receivable =
$1,800
Accounts payable =
$2,500
a.
28 days
b.
32 days
c.
35 days
d.
39 days
e.
43 days
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
113. Kiley Corporation had the following data for the most recent year (in millions). The new CFO believes (1) that an
improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit
department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms
and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales
or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
Original
Revised
Annual sales: unchanged
$110,000
$110,000
Cost of goods sold: unchanged
$80,000
$80,000
Average inventory: lowered by $4,000
$20,000
$16,000
Average receivables: lowered by $2,000
$16,000
$14,000
Average payables: increased by $2,000
$10,000
$12,000
Days in year
365
365
a.
34.0
b.
37.4
c.
41.2
d.
45.3
e.
49.8
a
Difficulty: Moderate
INTE.GENE.16.132 – LO: 21-3
United States – BUSPROG: Analytic
United States – AK – DISC: Working capital management
United States – OH – Default City – TBA
Cash conversion cycle
TYPE: Multiple Choice: Problem
114. Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000
a day on a 365-day basis. The firm’s cost of goods sold is 75% of sales. On average, the company has $9,000,000 in
inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction
in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%,
while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the
company’s cash conversion cycle? Round to the nearest whole day.
a.
−26 days
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
b.
−22 days
c.
−18 days
d.
−14 days
e.
−11 days
115. Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,000, an average inventory level of
$15,012,000, and average accounts receivable of $10,008,000. The firm’s cost of goods sold is 85% of sales. The company
makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade
credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but
inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash
conversion cycle, assuming a 365-day year?
a.
−26.6 days
b.
−29.5 days
c.
−32.8 days
d.
−36.4 days
e.
−40.5 days
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
116. Tierney Enterprises is constructing its cash budget. Its budgeted monthly sales are $5,000, and they are constant from
month to month. 40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in
the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next month’s sales
are constant at 50% of projected sales for the next month. “Other payments,” which include wages, rent, and taxes, are
25% of sales for the current month. Construct a cash budget for a typical month and calculate the average net cash flow
during the month.
a.
$1,092
b.
$1,150
c.
$1,210
d.
$1,271
e.
$1,334
c
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
117. Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to
customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm’s average accounts
receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes
this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net
annual savings would be realized?
a.
b.
c.
d.
e.
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
e
118. Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What
is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
a.
25.09%
b.
27.59%
c.
30.35%
d.
33.39%
e.
36.73%
a
119. Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after
the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free
trade credit, based on a 365-day year?
a.
10.86%
b.
12.07%
c.
13.41%
d.
14.90%
e.
16.55%
Lockbox
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
120. The company you just started has been offered credit terms of 4/30, net 90 days. What will be the nominal annual
percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)
a.
16.05%
b.
16.90%
c.
17.74%
d.
18.63%
e.
19.56%
121. Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm
chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade
credit? (Assume a 365-day year.)
a.
20.11%
b.
21.17%
c.
22.28%
d.
23.45%
e.
24.63%
CHAPTER 21—SUPPLY CHAINS AND WORKING CAPITAL MANAGEMENT
122. Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.
What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
a.
14.34%
b.
15.10%
c.
15.89%
d.
16.69%
e.
17.52%
c
123. Safety Window and Door Co. buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on
time, 60 days after the invoice date. Net purchases amount to $450,000 per year. On average, how much “free” trade
credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)
a.
b.
c.
d.
e.
a