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    MAS311 Financial Management Exercises On Accounts Receivable Management and Inventory Management

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    Leanne Quinto
    This document contains 8 practice exercises related to accounts receivable management and inventory management. The exercises cover topics such as: 1) Calculating the impact of reducing days sales outstanding on a company's net income 2) Calculating average accounts receivable balances and investment in receivables 3) Determining savings from reducing a company's credit terms 4) Analyzing whether a company should adopt a new credit discount policy 5) Evaluating whether a company should relax its credit standards 6) Determining which new credit customer risk classes a company should accept 7) Calculating economic order quantity, average inventory, number of orders, total inventory cost, and reorder point for a company 8) Performing

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    MAS311 Financial Management Exercises On Accounts Receivable Management and Inventory Management

    Uploaded by

    Leanne Quinto
    831 views3 pages
    This document contains 8 practice exercises related to accounts receivable management and inventory management. The exercises cover topics such as: 1) Calculating the impact of reducing days sales outstanding on a company's net income 2) Calculating average accounts receivable balances and investment in receivables 3) Determining savings from reducing a company's credit terms 4) Analyzing whether a company should adopt a new credit discount policy 5) Evaluating whether a company should relax its credit standards 6) Determining which new credit customer risk classes a company should accept 7) Calculating economic order quantity, average inventory, number of orders, total inventory cost, and reorder point for a company 8) Performing

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    AR and Inventory

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    This document contains 8 practice exercises related to accounts receivable management and inventory management. The exercises cover topics such as: 1) Calculating the impact of reducing days sales outstanding on a company's net income 2) Calculating average accounts receivable balances and investment in receivables 3) Determining savings from reducing a company's credit terms 4) Analyzing whether a company should adopt a new credit discount policy 5) Evaluating whether a company should relax its credit standards 6) Determining which new credit customer risk classes a company should accept 7) Calculating economic order quantity, average inventory, number of orders, total inventory cost, and reorder point for a company 8) Performing

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    831 views3 pages

    MAS311 Financial Management Exercises On Accounts Receivable Management and Inventory Management

    Uploaded by

    Leanne Quinto
    This document contains 8 practice exercises related to accounts receivable management and inventory management. The exercises cover topics such as: 1) Calculating the impact of reducing days sales outstanding on a company's net income 2) Calculating average accounts receivable balances and investment in receivables 3) Determining savings from reducing a company's credit terms 4) Analyzing whether a company should adopt a new credit discount policy 5) Evaluating whether a company should relax its credit standards 6) Determining which new credit customer risk classes a company should accept 7) Calculating economic order quantity, average inventory, number of orders, total inventory cost, and reorder point for a company 8) Performing

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    MAS311 Financial Management

    Exercises on Accounts receivable management and Inventory Management

    1. Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its
    customers 30 days to pay.  The industry average DSO is 27 days, based on a 365-day
    year.  If the company changes its credit and collection policy sufficiently to cause its
    DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this
    change, how would that affect its net income, assuming other things are held constant?

    a. 267.34
    b. 281.41
    c. 296.22
    d. 328.22

    2. Queen Corporation sells on terms 2/10. n/30. 70% of customers normally avail of the
    discounts. Annual sales are P900,000, 80% of which is made on credit. Cost is
    approximately 75% of sales.

    Required: a) average balance of accounts receivable.


    b) average investments in accounts receivable.

    3. Joker Corporation makes credit sales of P2,160,000 per annum. The average age of
    accounts receivable is 30 days. Management considers shortening credit terms by 10
    days. Cost of money is 18%.

    Required: How much will the company save from financing charges? Assume a 360-day
    year.

    4. King Company presents the following information:

    Annual credit sales P25,200,000


    Collection period 3 months
    Rate of return 18%

    King Company considers changing its credit terms from n/30 to 4/10, n/30. The
    following are expected to result in (1) 30% of its customers will take advantage of the
    discount; (2) sales will remain constant; and (3) the collection period is expected to
    decrease to two months.

    Should King Company adopt the proposed discount policy? Show analysis.

    5. Jack Corporation reports the following information:

    Selling price per unit P10


    Variable cost per unit 8
    Total fixed cost P120,000
    Annual credit sales 240,000 units
    Collection period 3 months
    Rate of return 25%

    Jack considers relaxing its credit standards by granting extension of credit terms. The
    following are the expected results: (1) sales will increase by 25%; (2) collection costs will
    increase by P40,000; (3) bad debt losses are expected to be 5% of the incremental sales;
    and (4) collection period will increase to 4 months.

    Should the proposed relaxation in credit standards be implemented?

    a. Yes, savings is P30,000 per year.


    b. Yes, savings is P50,000 per year.
    c. No, loss is P14,500 per year.
    d. No, loss is P30,000 per year.

    6. Butterfly Company’s current sales are all on credit and amount to P750,000 a year. The
    firm has fixed costs of P100,000 and variable costs of 85% of sales. Butterfly has excess
    capacity which would permit it to expand sales without incurring additional fixed costs.
    One means of expanding sales is to grant credit of net 90 days to applicants who have
    been turned down in the past. The credit manager has prepared several estimates for each
    of three risks classes of applicants.

    Additional Sales Bad Debt Required


    Risk Total Sales (in PhP) (in PhP) ratio pre-tax rate
    Class of return
    A 800,000 50,000 5% 20%
    B 840,000 40,000 8% 24%
    C 860,000 20,000 12% 30%

    Required:
    a) What are the marginal pre-tax profits for each risk class?
    b) Which risk classes, if any, should Butterfly accept as new credit customer?

    7. Fruitcake specialist sells 36,000 fruit cakes annually. Annual carrying costs are P5 per
    fruit cake and the ordering costs are P100 per order. The firm has decided to maintain a
    safety stock of one month’s sales or 3,000 fruitcakes. The delivery time per order is 5
    days. Assume a 365 day year.

    a. What is the economic order quantity (EOQ)?


    b. What is the average inventory?
    c. How many orders should be placed each year?
    d. What is the total inventory cost?
    e. What is the reorder point?
    8. Dairy Ice Cream sells 12,000 gallons of ice cream each month from its central storage
    facility. Monthly carrying costs are P0.10 per gallon and ordering costs are P50 per
    order. Ignore potential stockout costs and assume a 30-day month.

    a. What is the economic order quantity (EOQ) for the ice cream?
    b. What is the average inventory?
    c. What is the total inventory cost for the month?
    d. What is the optimal length of the inventory cycle?
    e. How many orders will be placed each month?

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