Question 1

Draw a basic flowchart that depicts the components of collection time. Be sure to label all key points and explain the various components. In addition, offer one suggestion for decreasing the time required for each component.

Accepted Answer

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Question 2

Explain the basic structure and workings of a disbursement system that utilizes zero-balance accounts.

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Question 3

On June 22, Roy's Welding Shop purchased $3,300 worth of goods. The terms of the sale were 1/7, net 21. What is the effective annual rate of interest for the credit period for this sale?

Accepted Answer

Days of credit granted = 21 - 7 = 14 days; Periods per year = 365/14 = 26.071429; Interest rate for 14 days = [0.01 × $3,300]/[(1 - 0.01) × $3,300] = 0.010101; Effective annual rate = (1.010101)^26.071429 - 1 = 29.96 percent

Question 4

On May 11, you purchased $3,700 of merchandise from a supplier. The terms of the sale were 1/5, net 15. The discounted amount due is _____ which is payable no later than _____.

Accepted Answer

The terms 1/5, net 15 mean a 1% discount is available if paid within 5 days. The discount on $3,700 is $37, so the discounted amount is $3,663. The payment must be made by May 16 to receive the discount.

Question 5

Kelly's Corner writes 18 checks a day for an average amount of $630 each. These checks generally clear the bank 2.5 days after they are written. In addition, the firm generally receives an average of $16,400 a day in checks. Deposited amounts are available after 2 days. What is the amount of the firm's disbursement float?

Accepted Answer

To calculate the disbursement float, we need to subtract the available funds from the outstanding checks.

The amount of outstanding checks per day is:
18 checks/day * $630/check = $11,340/day

Considering that checks clear the bank 2.5 days after they are written, the total outstanding checks are:
18 checks/day * $630/check * 2.5 days = $28,350

The available funds per day are:
$16,400/day

Considering that deposited amounts are available after 2 days, the total available funds are:
$16,400/day * 2 days = $32,800

Therefore, the disbursement float is:
$28,350 - $32,800 = -$4,450

This means that the firm has negative float, which indicates that they need to take action, such as reducing the number of checks they write or increasing the speed of collections.

Question 6

Electronics and More offers credit terms of 1/5, net 20. What is the effective annual rate on a $12,000 purchase if you forgo the discount?

Accepted Answer

Days in period = 20 - 5 = 15 days; Periods per year = 365/15 = 24.333333; Interest rate for 15 days = [0.01 × $12,000]/[(1 - 0.01) × $12,000] = 0.010101; Effective annual rate = (1.010101)^24.333333 - 1 = 27.71 percent

Question 7

The Boat House offers credit terms of 2/15, net 45 to all of its customers. Historically, 86 percent of its customers take advantage of the discount. What is the firm's average collection period?

Accepted Answer

First, we need to calculate the discount period: 
2% discount for paying within 15 days 
100% - 86% = 14% of customers do not take advantage of the discount 
So, the non-discount period is 45 days

The weighted average collection period can be calculated as:

(86% × 15 days) + (14% × 45 days) = 12.9 + 6.3 = 19.2 days

Therefore, the average collection period of The Boat House is 19.2 days. The correct choice is C.

Question 8

Fischer's Furniture sells 2,400 sofas a year at an average price per sofa of $1,250. The carrying cost per unit is $11.60. The company orders 80 sofas at a time and has a fixed order cost of $52 per order. The sofas are sold out before they are restocked. What is the economic order quantity?

Accepted Answer

EOQ = √(2*80*52/11.60) = 147 sofas

Question 9

Coastal Gifts has an average collection period of 18 days and annual sales of $694,000. What is the average investment in accounts receivables as shown on the balance sheet?

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Question 10

Kay's House of Sound sells 520 musical instruments a year at an average price per instrument of $580. All sales are credit sales with terms of 2/10, net 25. Hogan's has found that 78 percent of its customers take advantage of the discounted price. What is the amount of the firm's average accounts receivables?

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Question 11

You purchased an item costing $5,700 on July 13. The terms of sale were 1/5, net 20. What is the last day you can pay the discounted price?

Accepted Answer

The terms 1/5, net 20 mean a 1% discount is available if paid within 5 days. July 13 + 5 days = July 18.

Question 12

Charlie's Bar writes 3 checks a day for an average amount of $5,400 each. These checks generally clear the bank 4 days after they are written. In addition, the firm generally receives and deposits checks amounting to $18,700 each day. All deposits are available on the next day. What is the firm's net float?

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Question 13

Rossiter's generally receives 3 checks a month in the amounts of $46,500, $32,000, and $63,800. On average, it takes 1.5 days for the funds from these checks to be added to the firm's available balance at the bank once they have been deposited. What is the amount of the average daily float?

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Question 14

On April 14, Brewster's purchased $9,800 worth of inventory. The terms of sale were 2/10, net 30. The implicit interest is _____ and the effective annual rate is _____ percent.

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Question 15

Brewster's writes 145 checks a day for an average amount of $211 each. These checks generally clear the bank 3.5 days after they are written. In addition, the firm generally receives an average of $48,700 a day in checks. The checks that are received are deposited immediately and the funds are generally available the following day. What is the amount of the firm's disbursement float?

Accepted Answer

First, we need to calculate the disbursement float:

Daily disbursements = 145 checks/day x $211/check = $30,595/day

Average time for checks to clear = 3.5 days

Disbursement float = Daily disbursements x Average time to clear = $30,595/day x 3.5 days = $107,082.50

Next, we need to calculate the firm's total float:

Total float = Disbursement float + Collection float

Collection float = Daily collections - Average time for checks to clear

Daily collections = $48,700/day

Average time for checks to clear = 1 day

Collection float = $48,700/day - 1 day = $48,700/day

Total float = $107,082.50 + $48,700 = $155,782.50

Therefore, the best choice is B, $107,082.50.

Question 16

Check kiting has been a means, although neither an ethical nor legal means, of allowing a firm to use its uncollected cash. How did the Check Clearing Act for the 21st Century (Check 21) affect this practice?

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Question 17

Charlies' writes 135 checks a day for an average amount of $480 each. These checks generally clear the bank in 3 days. In addition, the firm generally receives an average of $159,000 a day in checks that are deposited immediately. Deposited funds are available in 1.5 days. What is the firm's net float?

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Question 18

The Flowering Vine buys hanging plants for $2 each and resells them for $8.95 each. The firm sells 3,500 plants per year. Generally, the firm orders 400 plants at a time and has a fixed cost per order of $28. The carrying cost per unit is $1.16. To avoid newer plants mixing with older plants, the inventory is totally sold out before it is restocked. The total annual carrying cost is ____ and the total annual restocking cost is _____.

Accepted Answer

To find the total annual carrying cost, we need to first find the annual holding cost per unit, which is given by:

Annual holding cost per unit = Carrying cost per unit x Average inventory level

We can find the average inventory level by dividing the order quantity by 2, since on average we will have half of the order quantity in inventory at any time. So:

Average inventory level = Order quantity / 2 = 400 / 2 = 200

Therefore, the annual holding cost per unit is:

Annual holding cost per unit = 1.16 x 200 = 232

To find the total annual carrying cost, we can simply multiply the annual holding cost per unit by the number of plants sold per year:

Total annual carrying cost = Annual holding cost per unit x Number of plants sold per year
= 232 x 3500 = $812,000

To find the total annual restocking cost, we can use the following formula:

Total annual restocking cost = (Number of orders per year) x (Cost per order)

We can find the number of orders per year by dividing the total number of plants sold per year by the order quantity:

Number of orders per year = Number of plants sold per year / Order quantity
= 3500 / 400 = 8.75

However, since we can only order whole units, we need to round up to the nearest integer, which gives us 9.

Therefore, the total annual restocking cost is:

Total annual restocking cost = 9 x 28 = $252

So the correct answer is (C) $232 for total annual carrying cost and $245 for total annual restocking cost.

Question 19

During a normal month, Cunningham's Lumber receives a total of 8 checks with a total value of $546,000. On average, it takes 1 day from the date of deposit for the funds from these checks to be available to the firm. Assume each month has 30 days. What is the average daily float?

Accepted Answer

The average daily float can be calculated using the following formula:

Average daily float = Total float / Number of days

Where,
Total float = Value of checks deposited but not yet available
Number of days = Time taken for the checks to become available

Total float = $546,000
Number of days = 30 - 1 = 29

Therefore, average daily float = $546,000 / 29 = $18,827.59 ≈ $18,200 (rounded to the nearest dollar)

Hence, the best choice is A) $18,200.

Question 20

Stan Lee's sells 4,300 carpets a year at an average price per carpet of $1,490. The carrying cost per unit is $21.63. The company orders 500 carpets at a time and has a fixed order cost of $69 per order. The carpets are sold out before they are restocked. What is the economic order quantity?

Accepted Answer

The economic order quantity can be calculated using the formula:

EOQ = √((2DS)/H)

where D is the annual demand, S is the setup cost, and H is the holding cost per unit.

We have all the necessary information:

D = 4,300
S = $69
H = $21.63

Plugging in the values, we get:

EOQ = √((2*4,300*69)/21.63)
    = √27,579.78
    ≈ 166

Therefore, the optimal order quantity is 166 carpets.

Quiz 17: Working Capital Management