Fina 3313 Ch 12

Shortage costs are often classified as arising from two sources

1. Trading and order costs: these are the transaction costs associated with having to raise cash (such as brokerage costs) or inventory (such as overtime for workers). 2. Costs related to the lack of safety reserves: these are the lost sales and lost goodwill than occur when the firm does not have enough inventory or cannot extend credit to customers.

receivables period

365/receivables turnover ratio

Inventory Period

365/inventory turnover ratio

Mahrouq Technologies buys $10,261,535 of materials (net of discounts) on terms of 4/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit.

50.69

Mavericks Cosmetics buys $3,828,691 of product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year?

856.83

Carlisle Transport had $4,291 cash at the beginning of the period. During the period, the firm collected $1,638 in receivables, paid $2,099 to supplier, had credit sales of $6,361, and incurred cash expenses of $500. What was the cash balance at the end of the period?

Cash Balance at end of the period = Cash Balance at beginning of the period + received from receivables - paid to suppliers- cash expenses 4,291+1,638-2,099-500 3,330

aggressive, or restrictive, short-term financial policy

An aggressive policy means to hold little cash, low levels of inventory, and to encourage customers to pay in cash.

A conservative financial policy will increase the carrying costs for a firm

Carrying costs are the costs associated with holding higher levels of current assets.

Gillstrap Promotions has projected the following values for the next three months: JanuaryFebruaryMarchSales$352,000$379,000$402,285Purchases on Trade Credit$218,000$240,000$260,000Cash Expenses$88,000$91,000$94,000Taxes, interest, and dividends$18,000$20,000$41,000Capital Expenditures$50,0000$25,000 All sales are credit sales with 40% collected in the month of sale, 50% collected the following month, and the remainder collected in the second month after the sale. Credit purchases are paid in 30 days and all other items require immediate payment. Compute the net cash inflow for March.

Cash collection from sales = 402285*40% + 379000*50% + 352000*10% = $386,566 Less: Payment for Purchases = $240,000 Cash expenses = $94000 Taxes, interest and dividends = $41000 Capex = $25,000 numbers incorrect but answer is correct Net cash inflow = -$14,385

Libscomb Technologies' annual sales are $5,388,468 and all sales are made on credit, it purchases $4,119,187 of materials each year (and this is its cost of goods sold). Libscomb also has $572,348 of inventory, $512,622 of accounts receivable, and beginning and ending of year $459,618 and $411,200 accounts payables (respectively). Assume a 365 day year. What is Libscomb's Cash Cycle (in days)?

Cash conversion cycle = Operating cycle - days of payables outstanding Cash cycle = 85.42-38.58 Cash cycle = 46.84

It a firm run out of cash and has to sell assets, borrow, or default

Cash out

Inventory Turnover

Cost of Goods Sold / Inventory

Receivables Turnover

Credit Sales / Accounts Receivable

Davis Supply maintains an average inventory of 2,000 dinosaur skulls for sale to filmmakers. The carrying cost per skull per year is estimated to be $150.00 and the fixed order cost is $37. What is the economic order quantity (EOQ)? (Round to the nearest whole number.)

EOQ=((2 * annual qty * fixed cost per order)/annual holding cost per unit)^(1/2) (2*2000*37/150)^(1/2) PUT IN CALCULATOR 31

Hammond Supplies expects sales of 248,427 units per year with carrying costs of $3.96 per unit and ordering cost of $8.32 per order. Assuming the level of inventory is stable, what is the optimal average number of units in inventory?

EOQ=((2 * annual qty * fixed cost per order)/annual holding cost per unit)^(1/2) EOQ=((2*248427*8.32)/3.96)^(1/2)EOQ = 1021.71 Average inventory level = EOQ/2 Average inventory level = 1021.71/2 Average inventory level = 511 click

Cash Cycle Formula

Operating Cycle - Accounts Payable Period = Inventory Period + Accounts Receivable Period - Account Payable Period

An aggressive financial policy will minimize carrying costs, but may lead to shortage costs

Shortage costs are the costs that happen when a firm does not have enough current assets.

Cash inflows NEED TO LEARN MATH

income from your job, investments, and other sources

Operating Cycle

inventory period + accounts receivable period

A conservative, or flexible, policy

means that the firm has high liquidity by holding high levels of cash, lots of inventory, and being generous in extending credit to customers.

Mahrouq Technologies buys $18,768,742 of materials (net of discounts) on terms of 6/30, net 60, and it currently pays after 5 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).

terms of payment is 6/30 net 60 it means 6% discount is given if paid by 30th otherwise, it is payable by 60 days But it is paid actually after 5th day so discount % is 6% discount days is 5 payment days is 60 Nominal costs of trade credit formula = discount %/(1-discount %)*365/(payment days-discount days) =6%/(1-6%)*365/(60-5) =0.4235976789 or 42.36% So nominal cost of trade credit is 42.36%

Mavericks Cosmetics buys $4,142,229 of product (net of discounts) on terms of 7/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year? Answer in % terms to 2 decimal places.

terms of payment is 7/10 net 60 it means 7% discount is given if paid by 10th otherwise, it is payable by 60 days so discount % is 7% discount days is 10 payment days is 60 Effective Cost of trade credit foumula =( (1+(Discount%/(1-Discount%)))^365/(Payment days - discount days))-1 =( (1+(7%/(1-7%)))^(365/(60-10)))-1 =0.698534903 or 69.85% so its effective cost of trade credit is 69.85%