FM-Ch-8&9

A company's typical inventory holding period at any time is:

Raw materials: 15 days

Work in progress: 35 days

Finished goods: 40 days

Annual cost of goods sold as per the financial statements is $100 million of which the raw materials purchases account for 50% of the total.

The company has implemented plans to reduce the level of inventory held, the effects of which are expected to be as follows:

(1) Raw material holding time to be reduced by 5 days

(2) Production time to be reduced by 4 days

(3) Finished goods holding time to be reduced by 5 days

Assuming a 365-day year, what will be the reduction in inventory held?

• $2.603m

• $3.836m

• $1.918m

• $3.151m

Which TWO of the following are correct descriptions of net working capital?

• Current assets — current liabilities

• Inventory days + accounts receivable days — accounts payable days

• Current assets / current liabilities

• The long-term capital invested in net current assets

For the coming year, a company has budgeted sales of $2 million per month, 80% of which will be on credit. It expects its accounts receivable payment period to be three months.

Forecast average inventory and average accounts payable for the coming gear are $10 million and $4 million respectively.

What is the company's working capital requirement for the coming year (to one decimal place)?

• 10.8

• 11.09

• 12.07

• 12.5

Which TWO of the following statements about overcapitalisation and overtrading are correct?

• Overtrading often arises from a rapid increase in sales revenue

• Overcapitalisation results in a relatively low current ratio

• Overtrading may result in a relatively high accounts payable turnover period

• Overcapitalisation is the result of too much short-term capital

A company has annual credit sales of $27 million and related cost of sales of $15 million. The company has the following targets for the next year:

Trade receivables collection period: 50 days

Inventory holding period: 60 days

Trade payables payment period: 45 days

Assume there are 360 days in the year.

What is the net investment in working capital required for the next year?

• $8,125,000

•   $4,375,000

• $2,875,000

• $6,375,000

TS Co has daily demand for ball bearings of 40 a day for each of the 250 working days (50 weeks) of the year. The ball bearings are purchased from a local supplier for $2 each. The cost of placing an order is $64 per order, regardless of the size of the order. The inventory holding costs, expressed as a percentage of inventory purchase price, is 25% per year.

What is the economic order quantity (EOQ)?

• 1600

• 1700

• 1900

• 1750

EE Co has calculated the following in relation to its inventories.

Buffer inventory level - 50 units

Reorder size - 250 items

Fixed order costs - $50 per order

Cost of holding onto one item p.a. - $1.25 per year

Annual demand - 10,000 items

Purchase price - $2 per item

What are the total inventory related costs for a gear (to the nearest whole $)?

• 22219

• 22318

• 23598

• 24565

Which of the following statements concerning working capital management are correct?

1)    Working capital should increase as sales increase.

2)    An increase in the cash operating cycle will decrease profitability.

3)    Overtrading is also known as undercapitalisation.

• 1 and 2 only

• 1 and 3 only

• 2 and 3 only

• 1, 2 and 3

Wallace Co has annual credit sales of and on average customers take 60 days to pay, assuming a 360-day year. As a result, Wallace Co has a trade receivables balance of $750,000. The company relies on an overdraft to finance this at an annual interest rate of 10%.

Wallace Co is considering offering an early settlement discount of 1% for payment in 30 days. It expected that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30 days in order to obtain the discount.

If Wallace Co introduces the proposed discount, what will be the NET impact?

• $1,875 saving

• $1,875 cost

• $2,625 saving

• $2,625 cost

Which of the following statements is/are correct?

1)    Factoring with recourse provides insurance against bad debts.

2)    The expertise of a factor can increase the efficiency of trade receivables management for a company.

• 2 only

• 1 only

• Neither 1 nor 2

• 1 and 2