Reference no: EM133185904

Questions -

Q1. Floribama Clothing has generated $130,000 in sales during the past few months, and it is expected that this level of sales will continue for the next year. Based on past experience, 40 percent of the sales will be collected in the month of the sale, and these customers will take the 3 percent cash discount that is offered for early payment. The remaining 60 percent of the sales will be collected one month after the sale. Floribama normally purchases and pays for raw materials, which cost 70 percent of the sales prices, in the same month the finished goods are sold. Employees' wages represent 15 percent of the sales price, and monthly rent is $15,000. The company currently has no cash, but its target cash balance is $6,000. Construct Floribama's cash budget for the next three months.

Q2. Smitty's Chop Shop normally writes checks in the amount of $15,000 each day. It takes five days for these checks to clear through the banking system. The firm also receives checks in the amount of $12,000 daily but loses four days while they are being deposited and cleared. What is the firm's disbursement float, collections float, and net float?

Q3. On average, Bowden Farms receives checks that amount to $420,000 each day, whereas the amount of checks the company writes each day averages $380,000. It normally takes three days for incoming checks to clear through the banking system, and outgoing checks generally clear in five days. What is the firm's disbursement float, collections float, and net float?

Q4. Finology Company's average collection period (DSO) is 37 days, which is only seven days longer than the net 30 terms the company offers credit customers. Fifty percent of Finology's customers pay on average on Day 20, and 30 percent pay on Day 40. On what day do the remaining credit customers pay? Assume Finology has no bad debts.

Q5. Great Munchies (GM) Corporation has a variable operating cost ratio of 60 percent, its cost of capital is 12 percent, and current sales are $100,000. All of its sales are on credit, and it currently sells on terms of net 30. Its accounts receivable balance is $20,000. GM is considering a new credit policy with terms of net 45. Under the new policy, sales will increase to $120,000, and accounts receivable will rise to $30,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy.

Q6. Axis Wells and Excavation (AWE) currently generates $72,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $12,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $68,000, and accounts receivable will average $13,600. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy

Q7. Lewis Lumber is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $360,000, and the average collection period (DSO) is 62 days. Lewis estimates that tightening the credit terms would reduce annual sales to $355,000, but accounts receivable would drop to 38 days of sales. Lewis' variable cost ratio is 65 percent and its average cost of funds is 12 percent. Should the change in credit terms be made? Assume all operating costs are paid when inventory is sold and that all sales are collected at the DSO.