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16.6 Receivables Investment
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are
$912,500. Forty percent of customers pay on the 10th day and take discounts; the
other 60% pay, on average, 40 days after their purchases.
A. What is the days sales outstanding?
B. What is the average amount of receivables?
C. What would happen to average receivables if McDowell toughened its collection policy with the reusl that all nondiscount customers paid on the 30th day?
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working
capital to a new store. Masson buys from its suppliers on terms of 3/10, net
90, and it currently pays on the 10th day and takes discounts. However, it could
forgo the discounts, pay on the 90th day, and thereby obtain the needed
$500,000 in the form of costly trade credit. What is the effective annual interest
rate of this trade credit?
16.10 Effective Cost of Trade Credit
16.11 Cash Conversion Cycle
The Zocco Corporation has an inventory conversion period of 60 days, an average
collection period of 38 days, and a payables deferral period of 30 days. Assume that cost of goods sold is 75% of sales.
A. What is the length of the firm’s cash conversion cycle?
B. If Zocco’s annual sales are $3,421,875 and all sales are on credit, what is the
firm’s investment in accounts receivable?
C. How many times per year does Zocco turn over its inventory?
16.12Working Capital Cash Flow Cycle
The Christie Corporation is trying to determine the effect of its inventory turnover
ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s sales last year(all on credit) were $150,000, and it earned a net profit of 6%, or $9,000. It turnedover its inventory 7.5 times during the year, and its DSO was 36.5 days. Its annual cost of goods sold was $121,667. The firm had fixed assets totaling $35,000. Christie’spayables deferral period is 40 days.
A. Calculate Christie’s cash…