1. Eclipse Ellipticals, Inc., is considering a change in their credit terms.

The
firm is considering offering a 1.5% discount. Most likely competitors will
follow suit, so sales will remain at $1 million and 40% of sales will be
eligible to take advantage of the discount. The firm anticipates that
receivables will be reduced by $30,000 and the firm has an opportunity
cost of 18%. Should the firm change its credit terms?

a. Yes

b. No

c. It does not really matter as the benefits and the costs are identical.

d. It cannot be determined from the given information

2. In deciding the optimal level of current assets for the firm, management
is confronted with __________.

a. a trade-off between profitability and risk

b. a trade-off between liquidity and risk

c. a trade-off between equity and debt

d. a trade-off between short-term versus long-term borrowing

3. The existence of __________ on the balance sheet generates tax

advantages that directly influence the capital structure of the firm.

a. a large proportion of fixed assets

b. long-term debt

c. retained earnings

d. All of the above answers are

4. A firm makes all purchases on credit. Cash payment on this trade credit
is required in the month following purchase on 70% of all purchases. The
firm takes a 2% cash discount and makes payment for the remaining
30% of all purchases in the month of purchase. Forecasted purchases for
January through April are $300,000, $375,000, $450,000, and $300,000
respectively. In the month of March, what is the total cash disbursement
for purchases?

a. 132,300

b. 403,200

c. 450,000
 d. 394,800

5. The following statements have been made about the probable long-term
effects of introducing a just-in-time system of inventory management:

I) Inventory holding costs increase

II) Labour productivity improves

III) Manufacturing lead times decrease

Which of the above statements are true?

a. I, II and III

b. I and II only

c. I and III only

d. II and III only

1. Kazu Trading Ltd is a distributor of Nepalese ‘cashew nuts’ that is gaining a lot of
popularity throughout the world. The business, which had annual credit sales of $6
million last year, is expected to increase its credit sales to $10 million in the next year
and the gross profit margin is expected to be 27%.

With increased sales, the company has experienced working capital shortage,
especially in the financing of debtors. The average collection period for sales has
averaged 50 days. In addition, 1.5% of sales are written off as bad debts each year.
The trade debtors are currently financed through a bank overdraft which has an
interest rate of 11% per annum.

Kazu pays its suppliers within 25 days. The management accountant has told us that
the operating cycle extends to 65 days. We are also told that the current ratio of Kazu
is 1.4 and the cost of long term debts for it is 14%.

The company has recently been in talks with a factor that is prepared to make an
advance to the company equivalent to 80 per cent of debtors. The interest rate for the
advance will be 10% per annum. The factor will take over credit control procedures of
the business and this will result in a saving to the business of $23,000 per annum.
However, the factor will make a charge of 2 per cent of sales for this service. The use
of the factoring service is expected to eliminate the bad debts incurred by the
business.

Required:
a. Calculate the working capital requirement for the next year assuming that all
debtors will pay within the standard 50 days.
(4 marks)
b. Discuss the ways in which factoring and invoice discounting are different from
each and how they can assist in the management of accounts receivable.
(8 marks)
c. Calculate the net cost of the factor agreement to the company and state whether or
not the company should take advantage of the opportunity to factor its trade debts.
(8 marks)
2. The following budgeted sales values have been extracted from the budget of AZ
Limited for the year ending 31 December 20X7.
$
April 400,000
May 450,000
June 520,000
July 420,000
August 480,000

The contribution/sales ratio is 40%. Fixed costs are budgeted to be $1,200,000 for the
year arising at a constant rate per month and including depreciation of $300,000 per
annum.

40% of each month's sales are produced in the month prior to sale, and 60% are
produced in the month of sale. 50% of the direct materials required for production are
purchased in the month prior to their being used in production.

30% of the variable costs are labour costs, which are paid in the month they are
incurred.

60% of the variable costs are direct material costs. Suppliers of direct materials are
paid in the month after purchase.

The remaining variable costs are variable overhead costs. 40% of the variable
overhead costs are paid in the month they are incurred, the balance being paid in the
month after they are incurred.

Fixed costs are paid in the month they are incurred.

Capital expenditure expected in June is $190,000.

Sales receipts for the three months of May, June and July are budgeted as follows:
$
May 401,700
June 450,280
July 425,880

The bank balance on 1 May 20X7 is expected to be $40,000.

Required
Prepare a cash budget for AZ Limited.

Your budget should be in columnar format showing separately the receipts, payments
and balances for each of the months of May, June and July 20X7.

(20 marks)