PFM 3-1

54. Joy Plc’s cash budget highlights a short-term surplus in the near future. Which of the following actions would be appropriate to make use of the surplus?

55. Indicate, by clicking in the relevant boxes, whether the following statements are true or false.

A. Working capital should increase as sales increase

B. An increase in the cash operating cycle will decrease profitability

C. Overtrading is also known as under-capitalisation

56. SM Co has daily demand for ball bearings of 40 a day for each of the 250 working days (50 weeks) of the year. The ball bearings are purchased from a local supplier for $2 each. The cost of placing an order is $64 per order, regardless of the size of the order. The inventory holding costs, expressed as a percentage of inventory purchase price, is 25% per year.

What is the economic order quantity (EOQ)?

57. Mish Co has calculated the following in relation to its inventories.

What are the total inventory related costs for a year (to the nearest whole $)?

58. Which of the following might be associated with a shortening working capital cycle?

57. The following information has been calculated for ABC Co:

What is the length of the working capital cycle?

60 .Simmer Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay, assuming a 360-day year. As a result, Simmer Co has a trade receivables balance of $750,000. The company relies on an overdraft to finance this at an annual interest rate of 10%.

Simmer Co is considering offering an early settlement discount of 1% for payment in 30 days. It expected that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30 days in order to obtain the discount.

If Simmer Co introduces the proposed discount, what will be the NET impact?

61. Which of the following is LEAST likely to be used in the management of foreign accounts receivable?

62. A company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items. How will this transaction affect the current ratio and the quick ratio immediately after the transaction?

Indicate whether each ratio will increase or decrease.

A. Current ratio

B. Quick ratio

63. The cash operating cycle is equal to which of the following?

64. Which of the following is NOT a drawback of the EOQ model?

65. Which of the following is NOT a potential hidden cost of increasing credit taken from suppliers?

66. Which TWO of the following would be most likely to arise from the introduction of a just-intime inventory ordering system?

67. A company has annual credit sales of $27 million and related cost of sales of $15 million. The company has the following targets for the next year:

Trade receivables days     50 days

Inventory days                  60 days

Trade payables                  45 days

Assume there are 360 days in the year.

What is the net investment in working capital required for the next year?

68. Which of the following would be an aspect of a company’s accounts payable policy?

69. A company is preparing its cash flow forecast for the next financial period. Which TWO of the following items should be included in the calculations?

70. A company needs $150,000 each year for regular payments. Converting the company’s short-term investments into cash to meet these regular payments incurs a fixed cost of $400 per transaction. These short-term investments pay interest of 5% per year, while the company earns interest of only 1% per year on cash deposits.

According to the Baumol Model, what is the optimum amount of short-term investments to convert into cash in each transaction (to the nearest $’000)?

71. The treasury department in Bell Co has calculated, using the Miller-Orr model, that the lowest cash balance they should have is $1m, and the highest is $10m. If the cash balance goes above $10m they transfer the cash into money market securities.

Are the following true or false?

A. When the balance reaches $10m they would buy $6m of securities.

B. When the cash balance falls to $1m they will sell $3m of securities.

C. If the variance of daily cash flows increases the spread between upper and lower limit will be increased.

72. Which of the following is NOT usually associated with overtrading?

73. Although cash needs to be invested to earn returns, businesses need to keep a certain amount readily available. Which TWO of the following are reasons for holding cash?

73. AW Co is a large listed company financed by both equity and debt. In which of the following areas of financial management will the impact of working capital management be smallest?

75. Which statement best reflects an aggressive working capital finance policy?

76. What are the TWO key risks for the borrower associated with short-term working capital finance?

77. Gree Co is due to receive goods costing $2,500. The terms of trade state that payment must be received within three months. However, a discount of 1.5% will be given for payment within one month. Which of the following is the annual percentage cost of ignoring the discount and paying within three months?

78. Which of the following is an advantage of implementing just-in-time inventory management?

79. Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range:

Maximum           Minimum

Inventory (days)                    120                       90

All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.

In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?