Please see the attached quiz. No guided solutions necessary.

F305 Quiz 5 2014 Spring Each question worth 3 points // Please put all answers on scan sheet 1. Suppose Lil Eli, Inc. does a cost study of its costs of issuing credit to customers and notes that the costs of maintaining a credit department and the lost return on foregone money market investments exceeds the potential amount of profits lost on sales to customers who were rejected credit. Using just this information, which of the following would you advise to LE? a. Tighten credit terms b. Loosen credit term c. Pay invoices to suppliers more quickly d. Purchase inventory in smaller quantities 2. ft, Inc., determines that its Operating Cycle is 61 days. Which of the following best describes the significance of this fact? a. It takes 61 days for ft, Inc to purchase and sell its inventory b. ft, Inc must arrange 61 days of short-term financing for every unit of inventory sold c. ft, Inc experiences a net use of cash for 61 days d. ft, Inc takes 61 days to purchase inventory, sell it, and collect on the sale 3. With regard to question #2, assume that ft, Inc has an Accounts Payable period of 33 days. Which of the following must be true? a. b. c. ft, ft, ft, ft, d. 4. Inc Inc Inc Inc experiences a net use of cash equivalent to 33 days of operations experiences a net use of cash equivalent to 28 days of operations must arrange short term financing for 33 days during the operating cycle is employing a flexible short-term financial policy You've been hired to suggest a Short-Term Financial Policy for a newly formed firm. You've established two business factors that you believe are the most important determinants of this firm's success: Since they are a new firm, quick access to Capital may be difficult While they have a good product, they are entering a highly competitive marketplace. With ONLY these two facts in mind, where would you place this firm on the Short Term Policy grid shown? (Indicate the letter shown in the appropriate cell of the grid.) Investment in Current Assets Flexible Restrictive Financing Strategy Conservative Aggressive A C B D Use the following information to answer questions 5 - 7 St. Hubbins Industrial Technologies (STHIT) has an Inventory Turnover of 20x and Accounts Receivable Turnover of 15x. 5. Assuming a 360 day year, based upon the above information, which of the following is MOST accurate? a. b. c. d. The average unit of inventory is in stock for 18 days The average collection period is 24 days It takes 42 days for STHIT to acquire goods, sell them, and collect on the sale All of the above are accurate MORE ON BACK 6. They are considering loosening their credit term in order to respond to increased competition in the marketplace. Which of the followingall else the samewould be the most likely effect of their proposed change in credit policy? a. b. c. d. 7. Their Operating Cycle would increase since their Average Collection Period would increase Their Cash Cycle would increase since their Operating Cycle would increase The amount of financing they would have to have in place would increase All of the above would likely happen if they loosen their credit terms Suppose, based upon the initial information in the problem, that STHIT determines that their Cash Cycle is 12 days long. If their average Accounts Payable balance during the year was $30,000, what was the approximate Cost of Goods Sold for the year? (Again, assume a 360 day year for simplicity). a. $240,000 F305 Quiz 5 Solutions b. $360,000 c. $642,755 d. $10,800,000 No. 1 Answ er A 2 3 D B 4 A 5 D 6 D 7 B Comments Since Carrying Costs exceed Shortage Costs, the firm should have a lower balance in AR. The way to do that (without sacrificing Sales) would be to tighten credit terms (i.e. shorten the credit period offered to customers). That's the definition of the Operating Cycle. (See slide 16.4) The firm's Cash Cycle would be 61 - 33 = 28 days. The firm has a net use of cash for 28 days; see the definition of the Cash Cycle. (Slide 16.5) Difficulty in raising capital quickly would suggest a CONSERVATIVE financing stance. High competition implies high shortage costs, which suggests a FLEXIBLE asset policy. The two intersect in quadrant A Using a 360 day year: Inv Period = 360/20 = 18 days A/R Period = 360/15 = 24 days Operating Cycle = 18 + 24 = 42 days. Again, all true. Looser credit terms (on level sales) would result in a longer A/R Period, which would increase the Operating Cycle, which would increase the Cash Cycle (all other items the same). If the Cash Cycle is 12 days long, then the AP Period = 42 - 12 = 30 days. AP Period = 360/AP Turnover 30 = 360/AP Turnover AP Turnvoer = 12x AP Turnover = COGS/AP 12 = COGS/30,000 COGS = $360,000