Week 6 Group competiton PDF

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Week 6 Group competition solutions   1)Sales 122,800 CostofGoodsSold 104,380 AccountsReceivable 10,900 Inventory 1420 AccountsPayable 22,640  CromwellLimitedhastheinformationshownaboveonitsannualIncomeStatementandBalanceSheet (allnumbersshownareinthousands).WhatisCromwellʹscashconversioncycle? A)‐36.1days B)24.3days C)‐41.8days D)111.6days D)116.54days  Answer:C Feedback: CCC 

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Inventory Accounts Receivable Accounts Payable   Average daily COGS Average daily sales Average daily COGS 1420 10, 900 22, 640   104, 380 / 365 122, 800 / 365 104,380 / 365

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 4.97 days  32.40 days  79.17 days   41.8 days

 2)Thedifferencebetweenafirmʹsoperatingcycleanditscashcycleis A)itsaccountsreceivabledays. B)itsinventorydays. C)itsaccountspayabledays. D)Thereisnodifferencebetweenthecashandoperatingcycles. E)Noneoftheabove.  Answer:C Feedback:Thedifferencebetweenafirmʹsoperatingcycleanditscashcycleisitsaccountspayabledays. 

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3)Whichofthefollowingwoulddecreaseafirmʹscashconversioncycle? A)Increasetheaccountspayabledays. B)Increasetheaccountsreceivabledays. C)Increasetheinventorydays. D)Increasethecashdays. E)Noneoftheabove.  Answer:A Feedback:cashconversioncycle(CCC)=InventoryDays+A/RDays–A/PDays  Anincrease intheaccountspayabledayswilldecreasetheCCC.  AdecreaseinaccountsreceivabledaysorinventorydayswilldecreasetheCCC.   4)Afirmoffersitscustomers3/5net25.Whatisthecostoftradecredittoacustomerwhochoosestopay onday25? A)68.4% B)32.3% C)65.5% D)74.3% E)83.8%  Answer:D Feedback:$3/$97 = 0.0309, or 3.09% interest for 20 days. There are 365/20 = 18.25 20-day periods in a year. Thus, your effective annual rate is (1.0309)18.25-1 = 0.743, or 74.3%  5)CollectionfloatismadeupofallofthefollowingEXCEPT: A)availabilityfloat B)disbursementfloat C)processingfloat D)mailfloat E)Alloftheabove  Answer:B Feedback:Collectionfloatismadeupofavailabilityfloat,processingfloatandmailfloat.Disbursement floatisnotapartofthecollectionfloat.Disbursementfloatistheamountoftimeittakesbeforeafirm’s paymentstoitssuppliersactuallyresultinacashoutflowforthefirm.            

6)WhichofthefollowingstatementsisFALSE? A)Tradecreditis,inessence,aloanfromthesellingfirmtoitscustomer. B)Theaccountsreceivablebalancerepresentstheamountthatafirmowesitssuppliersforgoodsthatit hasreceivedbutforwhichithasnotyetpaid. C)Thetransactioncostsforobtainingtradecreditarelowerthanalternativefinancingoptions. D)Providingfinancingatbelow‐marketratesisanindirectwaytolowerpricesforonlycertain customers. E)Noneoftheabove.  Answer:B Feedback:Theaccountspayablebalancerepresentstheamountthatafirmowesitssuppliersforgoods thatithasreceivedbutforwhichithasnotyetpaid.   7)SwenCorphadsalesof$154millionthisyearandanaccountsreceivableof$18million.Itscreditterms specifyʺ2/14net40.ʺOnaverage,howlongdoesittaketocollectonits sales? A)8.5days B)13days C)43days D)28days E)23days Answer:C Feedback: Accounts Receivable balance 18,000,000 Receivable days    43 days  Sales / 365 154,000,000 / 365

  8)Whatistheeffectiveannualcostofcredittermsof1/10net30,ifthefirmstretchestheaccountspayable to45days? A)18.03% B)8.49% C)11.05% D)10.91% E)42.15%  Answer:C Feedback:Inthiscase,thefirmisstretchingits accountspayable.The firm ispaying $1 to borrow$99,so theinterestrateperperiodis $1/$99=0.0101%.However,the loanperiodisnow35 days((30–10) +(45‐ 30)).Theeffectiveannualrateis:EAR=(1.0101)365/35–1=11.05%.

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9)Whichofthefollowingis/aredirectcostsassociatedwithinventory? I. Acquisitioncosts II. Carryingcosts III. Ordercosts A)IandII B)IIandIII C)Ionly D)IandIII E)I,II,andIII  Answer:E Feedback:Costsofholdinginventoryare:  Acquisitioncosts:arethecosts oftheinventoryitselfovertheperiodbeinganalysed (usuallyoneyear);  Ordercosts:arethetotalcostsofplacinganorderovertheperiodbeinganalysed;  Carryingcosts:includestoragecosts,insurance,taxes,spoilage,obsolescenceandthe opportunitycostofthefundstiedupintheinventory. 

   10)Whichofthefollowingisthemajorbenefittoafirmofusingjust‐in‐timeinventorymanagement? A)Itlargelyeliminatesthecarryingcostsofmaintainingalargeinventory. B)Itincreasesacquisitioncostsforplacinggoodsininventory. C)Itminimisesthetotalnumberoforders thatthefirmplaces. D)Itminimisestheriskofstock‐outs. E)Noneoftheabove.  Answer:A Feedback:JITinventorymanagementiswhereafirmacquires inventorypreciselywhenneededsothat itsinventorybalanceisalwayszero,orveryclosetoit.Thiswillmainlyhaveamajoradvantageof reducingcarryingandacquisitioncostsbutwillincreasenumberofordersafirmplacesandincreasethe riskofstockouts.

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