Question 2 [4-Marks]

1. Kareem & Sons last year reported sales of 12 million and an inventory turnover ratio of 4. The company is now adopting a new inventory system. If the new system is able to reduce the firms inventory level and increase the firms inventory turnover ratio to 8 while maintaining the same level of sales, how much cash will be freed up?
2. Medwing Corporation has a DSO of 19 days. The company averages 5,500 in credit sales each day. What is the companys average accounts receivable?
3. McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 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 result that all non-discount customers paid on the 40th day?

4. International Industries sells on terms of 3/10, net 50. Gross sales last year were 5,662,500 and accounts receivable averaged 547,500. Half of Internationals customers paid on the 15th day and took discounts. What are the nominal and effective costs of trade credit to Internationals non-discount customers? (Hint: Calculate sales/day based on a 360-day year, then calculate average receivables of discount customers and then find the DSO for the non-discount customers.
5. 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, net90, 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?