Julie Dahlquist; Rainford Knight

1 .

Intelligent Cookies Inc. (ICI) sold $30,000,000 of product in a year that had a cost of goods sold of $10,000,000. The average inventory carried by ICI was $500,000. On average, it takes 35 days for ICI’s customers, such as grocery stores and restaurants, to pay on their accounts. ICI buys ingredients, including flour, spices, and eggs, from its vendors on credit, and ICI takes about 40 days to pay its suppliers. How many days is ICI’s cash conversion cycle?

2 .

Shown below are account balances for Electra Engines Inc., a manufacturer. The accounts are shown in a random order. What is the amount of net working capital?

3 .

Shown below are account balances for Electra Engines Inc., a manufacturer. The accounts are shown in a random order. What is the current ratio and the quick ratio?

4 .

Imagine that these are the cash collection cycles for some well-run companies:

A table shows the types of companies and their cash conversion cycles. The Grocery chain has a conversion cycle of 6.20. The building/construction company has a conversion cycle of 162.69. The restaurant chain has a conversion cycle of 4.06. The department store has a cash conversion cycle of 63.60.

What types of conclusions can you reach when you see this kind of variability?

Imagine that those cash conversion cycles are based on this information:

What would be your analysis of the cash conversion cycles based on the above information (inventory turnover, accounts receivable turnover, and accounts payable turnover)? Use the worksheet below to summarize your conclusions.

Worksheet

5 .

What is the estimated annual percentage rate (APR) of not taking advantage of the early payment discount based on these terms: 4/15, n/45?

6 .

If you were a credit manager reviewing a potential customer’s request for a $20,000 line of credit, what would you analyze? Generally, how would the 5Cs of Credit guide your analysis and help lead you to a prudent decision to accept or reject the request?

7 .

Aspire Excellent Inc. is a book publisher. On March 1, Aspire sells $25,000 of books to Get Your Books Inc. (YBI), a large bookstore chain. The sale is made on account with terms net 60. Aspire’s customers usually take the full 60 days to pay their invoices. The books cost Aspire $10,000 to manufacture. Below, summarize the effect on the accounts on March 1 from the standpoint of the seller, Aspire Excellent Inc., and the buyer, YBI.

A table shows the line items accounts receivable, inventory, and sales for Aspire’s accounts. A space is provided to indicate the change (amount and direction of change: positive or negative) in the account. The line items accounts payable and inventory are shown for YBI’s accounts. A space is provided to indicate the change (amount and direction of change: positive or negative) in the account.

8 .

The financial manager of New England Blissful Dairies, a distributor of milk, cream, and ice cream products, has finished the 12-month operating budget. For the month of June, the following projections were made:

June 1 Cash Balance $90,000
Cash Receipts $300,000
Cash Disbursement $350,000

Taking into account an amount of cash that the firm likes to maintain as a target (minimum cash balance) of $75,000, prepare the cash budget for June using the format below. Assume that, if necessary, the company will draw upon a preestablished line of credit with their bank to be able to maintain the target cash balance.

A target cash balance sheet for New England Blissful Dairies shows beginning cash balance, cash collections, cash disbursements, net cash flow, preliminary ending cash balance, less: minimum cash balance, cash surplus or (deficiency), and ending cash balance for the month of June.

Will the company need short-term financing?

9 .

The sales for Re-Works Inc., a company that fabricates iron fencing from recycled metals, are all on account. For the first three months of the year, Re-Works management expects the following sales:

A table shows Re-Works Inc’s sales for January ($120,000), February ($130,000) and March ($140,000).

Based on past collection patterns, management expects the following:

A table shows Re-Works Inc’s collection patterns in the month of February showing month of sale (10%), month after sale (50%), and the remainder- second month after sale (40%).

Also, based on past experience, management forecasts that 5 percent of accounts receivable will be uncollectible and will eventually be written off.

What are the expected cash receipts for March?

10 .

With the same sales forecasts as in question 9, Re-Works Inc. management would like to implement some changes to credit policy and credit terms that they believe would change the collection pattern going forward and would lower the uncollectible accounts prediction to 3 percent.

What would be the expected cash receipts for March?

A table shows Re-Works Inc’s collection patterns in the month of February. The month of sale is 15%, month after sale is 55%, the remainder is 30%, and bad debt expense is 3%.

Review Questions