Question

12. Marshall Inc. recently hired your conting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high a th me. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365day year, what is the firm's present cash conversion cycle! $75.000 $600,000 $360,000 $160,000 $25,000 Average inventory Annual sales - Annual cost of goods sold - Average accounts receivable - Average accounts payable - a. 120.6 days b. 126.9 days c. 133.6 days d. 140.6 days e. 148.0 days 13. 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 ales 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 365day year? a. -26.6 days b.-29.5 days c. -32.8 days d. -36.4 days e. -40.5 days 14. Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30. The change is meant to meet competition, so no increase in sales is expected. The average accounts receivable balance will probably decline as a result of this change. a. True b. False 15. Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant. a. True b. False

Answer 1

Q12

DIO	365*Average Inventory/Cost of goods sold							Average Cost of Goods sold			360000
	76.04167							Average inventory			75000
								Annual Sales			600000
								Average Accounts receivables			160000
DSO	365*average accounts receivables/credit sales							Average accounts payables			25000
	97.33333
DPO	365*average payables/cost of goods sold
	25.34722
Cash conversion Cycle=DIO+DSO-DPO
148.0278
Answer is E

Q13

BEFORE					AFTER
Average Cost of Goods sold			43124750		Average Cost of Goods sold			43124750
Average inventory			15012000		Average inventory			13066000
Annual Sales			50735000		Annual Sales			50735000
Average Accounts receivables			10008000		Average Accounts receivables			8062000
Average accounts payables					Average accounts payables
DIO	365*Average Inventory/Cost of goods sold
	127.0588					110.5882
DSO	365*average accounts receivables/credit sales
	72					58
DPO	365*average payables/cost of goods sold
	30					40
Cash conversion Cycle=DIO+DSO-DPO
169.0588					128.5882					40.47059	Answer is E

Q14

Answer is b.False

If the firm changes the credit terms from 2/10 net 30 to 3/10 net 30. The number of credit days remains at 30 days. Discount percent is increased to 3% from 2% to match the competitors.

There are 2 methods for accounting the discounts. One is Gross and another is net methods.

In Net method, receivables are recorded at sale price - discount even if customer makes use of the discount or does not. If customer does not make use of the discount, a interest revenue is recognized (difference between face value and discounted value)

In gross method, receivables are recorded at face value

In both the methods, receivables will remain constant and not change.

Q15

Answer is b. False
	Year 1 (in Million)	Year 2 (in Million)
Sales	5	5.5
Account receivables (90% credit)	4.5	4.95
This clearly shows account receivables will also grow with increase in sales.