Name: 
 

CHAPTER 16: CURRENT ASSET MANAGEMENT


Short Answer
 

 1. 
Divide the following inventory items using the ABC inventory classification method:

Item
Inventory
A
$1,200
B
$   500
C
$84,650
D
$4,200
E
$  300
F
$  700
G
$5,100
H
$  750
I
$1,010
J
$76,350
 

 2. 
City Bakery is contemplating whether or not to extend payment terms to restaurants that have been opened less than one year.  The manager believes that the current annual sales projection of $1.8 million would increase by 10% if the terms were extended.  The company’s variable cost ratio is 0.65.  The firm would be required to increase raw material inventory by 20% of the sales increase.  While the receivables period is expected to remain at 14 days, the bad debt associated with these accounts is expected to be 12%.  Should City Bakery change its policy?
 

 3. 
Shady Furniture has an average accounts receivable of $2,125,000.  Credit sales account for 78% of the firm’s $28,840,000 annual sales.  What is the current average collection period?  If the company could reduce this collection period by three days and invest the funds at 6%, what is the increase to pre-tax earnings?
 



 
Check Your Work     Reset Help