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# Finance problems - inventory, credit policies, cash budget

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I need help with problems 26.7,26.14,27.8 and 28.10.

26.7 Indicate whether the following company actions increase, decrease, or cause no change to
the cash cycle and the operating cycle.
a. The use of discounts offered by suppliers is decreased.
b. More finished goods are being produced for orders instead of for inventory.
c. A greater percentage of raw materials purchases is paid for with cash.
d. The terms of discounts offered to customers are made more favorable for the customers.
e. A larger than usual amount of raw materials is purchased as a result of a price decline.
f. An increased number of customers pay with cash instead of credit.

26.14 Below are some important figures from the budget of Pine Mulch Company for the second quarter of 20X2.

27.8 Garden Groves, Inc., a Florida-based company, has determined that a majority of its customers are located in the New York City area. Therefore, it is considering using a lockbox system offered by a bank located in New York. The bank has estimated that use of the system will reduce collection float by three days. Based on the following information, should the lockbox system be adopted?

Average number of payments per day: 150
Average value of payment: \$15,000
Fixed annual lockbox fee: \$80,000
Variable lockbox fee: \$0.50/transaction
Annual interest rate on money-market securities: 7.5 percent

28.10 Major Electronics sells 85,000 personal stereos each year at a price per unit of \$55. All sales are on credit; the terms are 3_15, net 40. The discount is taken by 40 percent of the customers. What is the investment in accounts receivable?
In reaction to a competitor, Major Electronics is considering changing its credit terms to
5_15, net 40, to preserve its sales level. Describe qualitatively how this policy change will affect the company's investment in accounts receivable.

#### Solution Preview

26.7 Indicate whether the following company actions increase, decrease, or cause no change to the cash cycle and the operating cycle.

Operating Cycle = AR days + Inventory Days
Cash Cycle = Operating Cycle - Payable Days

a. The use of discounts offered by suppliers is decreased.

This reduces the payables period since we would not be taking the discounts, so no effect on the operating cycle but the cash cycle will decrease since payable days increase

b. More finished goods are being produced for orders instead of for inventory.

This will decrease the inventory days and so will decrease the operating cycle and the cash cycle

c. A greater percentage of raw materials purchases is paid for with cash.

This will reduce the payable days. There is no effect on the operating cycle but cash cycle will increase

d. The terms of discounts offered to customers are made more favorable for the customers.

More customers would take the discount and so the AR days will decrease. The operating cycle and cash cycle will decrease.

e. A larger than usual amount of raw materials is purchased as a result of a price decline.

This will increase the inventory days. The operating cycle and cash cycle will increase

f. An ...

#### Solution Summary

The solution has various finance problems dealing with inventory, AR credit policies, cash budget, Lockbox and cash and operating cycle

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