Chapter 16 Problems:

(16-1). Inventory Management

· Williams & Sons last year reported sales of $12 million, cost of goods sold (COGS) 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 and COGS, how much cash will be freed up?

(16-2). Receivables Investment

· Medwig Corporation has a DSO of 17 days. The company averages $3,500 in sales each day (all customers take credit). What is the company’s average accounts receivable?

(16-3). Cost of Trade Credit

· What are the nominal and effective costs of trade credit under the credit terms of 3/15, net 30?

(16-4). Cost of Trade Credit

· A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer’s effective cost of trade credit?

(16-5). Accounts Payable

· A chain of appliance stores, APP Corporation, purchases inventory with a net price of $500,000 each day. The company purchases the inventory under the credit terms of 2/15, net 40. APP always takes the discount but takes the full 15 days to pay its bills. What is the average accounts payable for APP?

(16-7). Cost of Trade Credit

· Calculate the nominal annual cost of nonfree trade credit under each of the following terms. Assume that payment is made either on the discount date or on the due date.

a. 1/10, net 20

b. 2/10, net 60

c. 3/10, net 45

d. 2/10, net 45

e. 2/10, net 40

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