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Finance Questions

Compute accounts receivable and situational accounting questions. See attached file for full problem description.

1. Text Problems, Exercises, and Case
Prepare answers to the following problems from the text, Fundamentals of Corporate Finance, (Brealey):

a. Chapter 19: Quiz Problem 1
Working Capital Management. Indicate how each of the following six different transactions that a company might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

b. Chapter 19: Practice Problem 14

Forecasting Collections. Here is a forecast of sales by National Bromide for the first 4 months of 2004 (figures in thousands of dollars):

Month: 1 2 3 4
Cash sales
15
24
18
14

Sales on credit
100
120
90
70

14. Forecasting Payments. If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter? In the following quarter? What if its payment delay is 60 days?

c. Chapter 20: Quiz Problem 4

4. Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank's charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?

Prepare answers to the following problems, exercise, and case from the text, Accounting: Concepts & Applications, (Albrecht):

Exercise 7-17 Assessing How Well Companies Manage Their Receivables
Assume that Hickory Company has the following data related to its accounts receivable:
2005
2006

Net sales
$1,425,000
$1,650,000

Net receivables:

Beginning of year
375,000
333,500

End of year
420,000
375,000

Chapter 7: Exercise 7-.17
Use these data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in 2005?

a. Chapter 7: Case 7-3
The president, vice president, and sales manager of Moorer Corporation were discussing the company's present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation's tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year's estimated credit sales of $3,000,000 could be increased by at least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this year's amount of $37,500. He argued that because the company's cost of sales is only 25% of revenues, the company would certainly come out ahead.

The vice president, however, suggested that a better alternative to easier credit terms would be to accept consumer credit cards such as VISA or MASTERCARD. She argued that this alternative could increase sales by 40%. The credit card finance charges to Moorer Corporation would be 4% of the additional sales.

At this point, the president interrupted by saying that he wasn't at all sure that increasing credit sales of any kind was a good thing. In fact, he suggested that the $37,500 of uncollectible accounts receivable was altogether too high. He wondered whether the company should discontinue offering sales on account.

With the information given, determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal. Also, address the president's suggestion that credit sales of all types be abolished.

b. Chapter 21: Problem 21-5

Problem 21-5 JIT Inventory
The president of Penman Corporation, John Burton, has asked you, the company's controller, to advise him on whether Penman should develop a just-in-time (JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company's cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of Penman's two competitors uses a JIT inventory system. Most of Penman's employees are trained to do only one job and belong to a local union. The union is strong and, in the past, has opposed major production changes. The union believes major changes will result in the loss of union employees' jobs. Your research indicates that Penman's major production item (a fairly new product in the market) should continue to have strong sales growth.

Required:
1. Using the information provided, advise John Burton to either continue the present system or work to develop a JIT inventory system.
2. Assume John decides to develop an inventory management system. He plans to evaluate the system after one year. List at least four possible performance measures John could use to evaluate the effectiveness of the system. Describe what information these measures would provide John.

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1. Text Problems, Exercises, and Case
Prepare answers to the following problems from the text, Fundamentals of Corporate Finance, (Brealey):

a. Chapter 19: Quiz Problem 1
Working Capital Management. Indicate how each of the following six different transactions that a company might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

a. Cash will reduce and working capital will reduce.
b. Cash will increase. No Change in Working Capital ( The accounts receivable get converted to cash and no change in the total current assets)
c. Cash will reduce. No change in working capital ( cash will reduce and accounts payable will reduce)
d. No change in cash ( the cash is invested in working capital). Working Capital will increase ( the long term loan is not a part of working capital and inventory increases)
e. No change in cash. Working Capital not change as current assets and current liabilities change by the same amount.
f. Increase in cash. No change in working capital ( type of asset changes - marketable securities to cash).

b. Chapter 19: Practice Problem 14

Forecasting Collections. Here is a forecast of sales by National Bromide for the first 4 months of 2004 (figures in thousands of dollars):

Month: 1 2 3 4
Cash sales
15
24
18
14

Sales on credit
100
120
90
70

On average, 50 percent of credit sales are paid for in the current month, 30 percent in the
next month, and the remainder in the month after that. What are expected cash collections
in months 3 and 4?

The collection would the cash sales in the month and the collection from the credit sales.

Month 3:
$18,000 + (0.5  $90,000) + (0.3  $120,000) + (0.2  $100,000) = $119,000
Month 4:
$14,000 + (0.5  $70,000) + (0.3  $90,000) + (0.2  $120,000) = $100,000

14. Forecasting Payments. If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter? In the following quarter? What if its payment delay is 60 days?

A 30-day period is one-third of a calendar quarter. So one-third of the purchases will be paid in the next quarter, and two-thirds will be paid in the current quarter. If the payment delay is 60 days, then two-thirds of the purchases will be paid for in the next quarter and one-third will be paid in the current quarter

c. Chapter 20: Quiz Problem 4

4. Lock Boxes. ...

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