Submitted by: Submitted by Cuzson
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Category: Science and Technology
Date Submitted: 01/08/2012 07:22 PM
FI16 – 1 William & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 5 while maintaining the same level of sales, how much cash will be freed up?
Ans –
Sales $10,000,000
Inventory Turnover ratio (old) 2
Inventory Turnover ratio (new) 5
Freed up Cash ?
So, let’s find out the freed up cash
We know level of inventory are calculated as follows
Inventory = SalesInventory turnover ratio
Calculating $ value of old inventory
Inventory Old = $10,000.0002
= $5,000,000
Calculating $ value of New inventory
Inventory New = $10,000,0005
= $2,000,000
The freed up cash would be = Old Inventory – New Inventory
= $5,000,000 - $2,000,000
= $3,000,000
16 – 2 Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day. What is the company’s average account receivable?
Ans –
If we recall the formula to calculate DSO (Daily Sales Outstanding):
DSO =
So we have DSO of 17 days and also have average sales i.e. $3,500
Putting this in equation
17 =
So Accounts Receivables will be
Accounts Receivable = 17 X $3,500
= $59,500
16 – 3 What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?
Ans –
Nominal cost of Trade formula is:
= discount percentage100- Discount Percentage x 365Days credit is Outstanding-Discount Period
So putting values in equation:
= 397 X 36530-15
= 0.03093 x 24.33
= 0.75263
= 75.26%
Effective Cost of Trade Formula is:
Periodic rate = 0.03 / 0.97 = 0.3093
Periods/year = 365 / (30-15) = 24.33
EAR = (1 + periodic rate)N – 1
= (1.03093)24.33 – 1 = 109.84%
16 - 4 A large retailer obtains merchandise under the...