AFM274 Chapter Notes - Chapter 26: Outsourcing

51 views2 pages

lemonbeetle804

13 Aug 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM274

Professor

Tu Nguyen

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Cash cycle: the length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. Cash conversion cycle (ccc): ccc = a/r days + inventory days a/p days. Operating cycle: the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product. Trade credit: the credit that a firm extends to its customers. Collection float: the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods. Mail float: how long it takes the firm to receive the cheque after the customer has mailed it. Processing float: how long it takes the firm to process the cheque and deposit it in the bank. Availability float: how long it takes before the bank gives the firm credit for the funds.

Related Questions

a. What is the difference between aâ firm's cash cycle and its operatingâ cycle? Select all that apply

A firm's cash cycle is the average length of time from when a firm pays cash for its inventory to when it receives cash from the sale of that inventory? (or the end product that the firm produced with the? inventory).

B. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is longer than the operating cycle of the firm.

C. firm's operating cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay for the inventory they purchase.

D. A firm's operating cycle is the average length of time between when a firm purchases its inventory and when the firm receives cash from the sale of the inventory. E. The cash cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay cash for the inventory they purchase minus the average number of days the firm takes to pay its suppliers for the inventory. F. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is shorter than the operating cycle of the firm.

amethystwater-buffalo366

1. Which of the following statements is most CORRECT?

A. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

B. If a firm "stretches" (i.e., delays paying) its accounts payable, then other things held constant, this will lengthen its cash conversion cycle (CCC).

C. If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

D. As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources. E. If a firm carries a constant amount of receivables as sales decline, then, other things held constant, this will reduce its cash conversion cycle (CCC).

coppermanatee695

National Imports, Inc. is a medium-size national auto repair shop for company of fleet cars with its corporate headquarters located in Orlando, Florida. The company operates in five states in the Northeastern United States. As the chief cash manager for the company; one of your responsibilities is to effectively manage the firmâs cash collection system. Your firm receives an average of 2,000 remittances per month with a total face value of $10,000. Under your current collection system, your customers remit their invoice payments directly to the corporate headquarters in Orlando. Therefore, the typical mail delay is 4 days and remittances remain at corporate headquarters for 3 days. As chief the cash manager, you have been informed that the average deposit receives good funds in 3 days. Assume that there is 365 days in a year. Complete parts a. through c. below.

Calculate the monthly total cost for your company's cash collection system if your firm's opportunity cost is 5% and your bank charges $0.25 per item deposited plus a monthly fixed cost of $300. For purposes of performing this calculation, refer to the Cost Analysis calculation process on page 327 in your text.












The bank is interested in selling you on their lockbox service, reducing your mail float days by 4 days, processing float days by 1 day, and availability float by 1 day. If the bank raises its bank charge per item to $0.40 and the monthly fixed cost from $300 to $400. All other items remain the same, including the opportunity cost of 5%.










Based upon your calculations and analysis, should you change to the lockbox service? Why or why not?

AFM274 Chapter Notes - Chapter 26: Outsourcing

Document Summary

Get access

Related Documents

AFM274 Study Guide - Final Guide: Credit Default Swap, C Max, Chapter 27

AFM274 Chapter Notes - Chapter 26: Cash Conversion Cycle, Working Capital, Accounts Payable

AFM274 Study Guide - Final Guide: Accounts Receivable, Corporate Bond, Vale Limited

Related Questions