BEC #10

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. The amount Skilantic Company must borrow to pay the supplier within the discount period and cover the compensating balance is

$64,615 Amt Need/(1.0-compensating balance %) =$60,000*.98)/(100%=9%) =$58,800/.91=$64,615

Selected data from Sheridan Corporation's year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities $120,000 Inventory turnover (based on cost of goods sold) 8 times Gross profit margin 40% Assuming no prepaid expenses are included in current assets, Sheridan's net sales for the year were

$800,000

uses 50 week yr in all calculations Sales: 10,000 units/yr Order quantity: 2,000 units Safety Stock: 1,300 units Lead time: 4 weeks

((10,000/50)*4)+1300 800+1300 2,100 Units

A company wants to approximate the 12% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?

1% , 15, net 45. [Discount % ÷ (100% - Discount %)] × [Days in year ÷ (Total payment period - Discount period)] Annual interest rate= [1.00% ÷ (100% - 1.00%)] × [365 days ÷ (45 days - 15 days)] = (1.00% ÷ 99%) × (365 days ÷ 30 days) = 1.01% × 12.17 =12.29%

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. Assuming Skilantic Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

12.09% Stated Rate/(1.0-Compensating balance %) =11%/(100%-9%) =11%/91% =12.09%

On July 1, Dichter Company obtained a $2,000,000, 180-day bank loan at an annual rate of 12%. The loan agreement requires Dichter to maintain a $400,000 compensating balance in its checking account at the lending bank. Dichter would otherwise maintain a balance of only $200,000 in this account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year, the effective interest rate on the borrowing is

12.67%

Morton Company needs to pay a supplier's invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance. Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

13.33% Stated Rate/(1-Compensating balance %) 12%/(100%-10%) 12%/90%

The following information regarding inventory policy was assembled by the TKF Corporation. The company uses a 50-week year in all calculations. Sales 12,000 units per year Order quantity 4,000 units Safety stock 1,500 units Lead time 5 weeks The reorder point is

2,700 Units Reorder point = Avg weekly demand x lead time) + safety stock 12,000 unit/50 weeks) x 5 weeks + 1,500 Units =1,2000 Units + 1,500 Units =2,700

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. Skilantic fails to take the discount and pays on the 40th day. Assuming a 360-day year, what effective rate of annual interest does it pay the vendor?

24.49% Skilantic is essentially borrowing $58,800 for 30 days. Thus, at a cost of $1,200, it acquires the use of $58,800, resulting in a rate of 2.0408% ($1,200 ÷ $58,800) for 30 days. Assuming a 360-day year, the effective annual rate is 24.49% [2.0408% × (360 days ÷ 30 days)].

Using a 360-day year, what is the opportunity cost to a buyer of not accepting terms 3/10, net 45?

31.81% (Discount %/100%-Discount)x(days in a yr/Total pmt period-discount period) (.03/1-.03)*(360/(45-30) (.03/.97)*(360/35)

The following computations were made from Bruckner Co.'s current-year books: Number of days' sales in inventory 55 Number of days' sales in trade accounts receivable 26 What was the number of days in Bruckner's current-year operating cycle?

81 55+26

365 day yr when computing ratios Dec 31 Yr 2 Dec 31 Yr 1 Net credit sales 6,205,000 Accounts Receivable 350,000 320,000 Inventory 960,000 780,000 COGS 4,380,000 Operating cycling for yr 2

92.21 Hold inventory for 72.50 days 365/(4380000 COGS/870000 avg inventory) Receivables is 19.71 days (365/6205000 sales/335000 avg receivables) Operating cycle is 92.21 days (72.50+19.71)

Quick (Acid) ratio = (Cash and equivalents + marketable securities + Net Receivables) / Current Liabilities

Accounts Receivable turnover = Net credit sales/Avg balance in Receivables Days Sales In Receivables = Days in Yr/AR Turnover Ratio

Following ratios useful for assisting a company's ability to meet currently maturing or short term obligations

Acid Test Ratio - Yes Debt to Equity Ratio - No

To determine inventory re-order point, calculations normally include the

Average daily uses

Accounts payable turnover = COGS/Avg bal in AP

Avg Payable Period = days in Yr/AP Turnover

A company has a current ratio of 1.5. This ratio will decrease if the company

Borrows cash on a 9 moth note

Each of the following periods is included when computing a firm's target cash conversion cycle except the Cash discount period inventory conversion period payables deferral period average collection period

Cash discount period

Changes in costs are more conductive to switching from a traditional inventory ordering system to a just in time ordering system

Cost per purchase order - decreasing Inventory unit carrying costs - increasing

Networking Capital = Current Assets - Current Liabilities

Current Ratio = Current Assets/Current Liabilities

Inventory turnover, # of times in a yr the total balance of inventory is converted to cash or receivables. Inventory turnover = COGS/Avg balance in inven

Days sales in inventory avg number of days between getting inven in stock and selling it Days sales in inven=Days in yr/inven turnover ratio

Trade Credit

Discount %/100%-Discount % x Days in Yr/Pmt Period - Discount Period

Total borrowing = Amt need/(1-Stated Rate)

Effective Rate on discount loan = Stated Rate / (1-Stated Rate)

Simple short term loans = Interest expense = principal of loan x stated rate x time

Effective interest rate = interest expense/usable funds

Total Borrowings = Amt Need/(1-compensating balance %)

Effective rate with compensatory balance = Stated Rate/(1-Compensating balance)

Benefits of just in time system for raw materials usually include

Elimination of nonvalue-adding operations

In a comparison of Year 2 with Year 1, Baliol Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Gross Profit percentage decreased

Cash conversion cycle = average collection period + days sales in inventory - average payables period Amts payable turnover = COGS/Avg balance in AP Avg payable period = Days in yr/AP Turnover

Higher AP turnover - more liquid Avg payable period lower - more liquid

Given that sales stay constant, a change in term of credit from 3/10, n/30 to 1.5/10, n/30 will most likely impact

Increase both current ratio and operating cycle

Which of the following changes will most likely increase a company's possibility of obtaining a short-term loan from a bank?

Increase in inventory turnover

Key Co. changed from a traditional manufacturing operation with a job-order costing system to a just-in-time operation with a backflush costing system. What are the expected effects of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?

Inspection cost - decrease Detail of Costs Tracked to Jobs - Decrease

Just in time inventory - moving, handling, and storage of inventory are treated as nonvalue-adding securities. Production of goods doesn't begin until an order has been received.

Kanban, visual workflow management system

As a consequence of finding a more dependable supplier, Dee Co. reduced its safety stock of raw materials by 80%. What is the effect of this safety stock reduction on Dee's economic order quantity?

No effect

Inventory Ratio Inventory Turnover = (COGS) / Avg balance of inventory Days' sales in inventory = Days in yr/Inventory turnover Ratio

Operating cycle = Days in Receivables + days sales in inventory Cash Conversion cycle = avg collection period + days sales in inventory

You want a high inventory turnover and a low days sales in inventory

Operating cycle: Time between the acquisition of inventory and the collec Days' sales in receivables + days' sales in inventory

Purchase Costs - actual invoice amts charged by suppliers Carrying costs - broad category such as interest, insurance, security and spillage.

Ordering costs - fixed costs of placing an order with a vendor Stockout costs - opportunity costs of not being able to fill customers orders.

Which of the following assumptions is associated with the economic order quantity formula?

Periodic demand is known

Periodic inventory systems - COGS only updated when physical inventory counts are made

Perpetual inventory systems - every item received is individually recorded in the tracking system. Inven and COGS updated after every sale

Values effectiveness in which how well the company uses its assets

Receivables Turnover - Yes Dividend Payout - No

The internal auditor who works in enterprise risk management (ERM) performs each of the following activities except

Setting the risk appetite of the organization

Morton Company needs to pay a supplier's invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance. The amount Morton Company must borrow to pay the supplier within the discount period and cover the compensating balance is

Total Borrowing = amt needed / (1-compensating balance %) (50,000*.98)/(1-.10)

SkyBlue Co. wants to approximate the 9% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?

[Discount % ÷ (100% - Discount %)] × [Days in year ÷ (Total payment period - Discount period)]

A company wants to approximate the 10.5% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?

[Discount % ÷ (100% - Discount %)] × [Days in year ÷ (Total payment period - Discount period)] Annual interest rate =[1% ÷ (100% - 1%)] × [365 days ÷ (45 days - 10 days)] =(1% ÷ 99%) × (365 days ÷ 35 days) =1.01% × 10.43 =10.53%

An appropriate technique for planning and controlling manufacturing inventors, ie raw materials whose demand depends on the level of production is

materials requirements planning