Infolink College

Group Assignment (20%)

ASSIGNMENT-II
COURSE: Financial Management -II
PROGRAM: BA - Accounting & Finance (2nd Years Regular, Weekend and Evening)
LECTURERs: EPHREM T. (MBA) & Associate MSc in Development Economics.
Marks: The assignment carries Twenty (20) per cent of the total marks for the course.
Due Date: Will be determining as per the college schedule.

1. The following is an example of a cash budget for the 90 days provided below for the XYZ
Company:

Analysis of the financial statements of the XYZ Company shows that the accounts receivable
remain at about 500,000 throughout the year; that is, there is no seasonal fluctuation in sales. The
accounts receivable turns over six times a year, or once every 60 days. The inventory throughout
the year remains at about 800,000 and turns over 90 days. The account payable remains at about
400,000 and turns over eight times a year, about once every 45 days. With an account receivable
collection period of 60 days and an average balance outstanding of 500,000, it appears that
750,000 is the amount that should be collected on the receivables in 90 days. Cash sales should
amount to about 250,000 if inventory of 800,000 valued at cost turns over once in 90 days and if
the average markup is about 200,000. Therefore, if an inventory of 1,000,000 at retail turns over
once every 90 days and 750,000 flows through accounts receivable, then approximately 250,000
must be sold on a cash basis. Cash payments for expenses and dividends are estimated to be
150,000 and 50,000 in the next 90 days, respectively.

a) Prepare a cash budget for next 90 days if the beginning cash balance is 320,000.
b) Compute the cash Cycle, &Operating Cycle
2. An ice cream company produces 100,000 cases of black walnut & cherry ice cream each
year. Switching the production line from another flavor to black walnut & cherry costs
$1,000 each time for cleaning, assembling, putting the ingredients in the correct places, etc.
The cost of each case is $100. The company estimates their inventory carrying cost is 30% of
inventory value per year.

Required: Determine:
A. The EOQ
B. How many lots or runs per year?
C. What is the total cost of inventory?
D. If they decided to use orders of 2,500 cases per run, determine the total
cost of inventory.

3. Assume our Co. in the above illustration where EOQ is 6,500. Assume also that the supplier
offered 2% quantity discount on purchases of 10,000 units and more. Should the Co. order
 EOQ or 10,000 units if the list price is $4.92? Compare the savings in purchase price that
would result if its ordering quantity were increased to 10,000 units and the increase in total
inventory cost caused by the departure from the EOQ.

A firm extends credit on 2/15, n/45. Sales during the year were 150,000 units at $ 37 per unit.
Unit cost is $ 22. Collection costs average $ 0.80 per unit and the firm’s cost of capital is 15%.

Compute:

A. The cost of carrying A/R if all customers do not take the discount.
B. The cost of carrying A/R if the discount is taken by all customers.
C. The cost to the firm in profit for providing the buyers with a 2% discount.
4. A firm extends credit on 2/15, n/45. Sales during the year were 150,000 units at $ 37 per unit.
Unit cost is $ 22. Collection costs average $ 0.80 per unit and the firm’s cost of capital is
15%.

Compute:

A. The cost of carrying A/R if all customers do not take the discount.
B. The cost of carrying A/R if the discount is taken by all customers.
C. The cost to the firm in profit for providing the buyers with a 2% discount.

5. A firm has an investment in the credit sales as $ 100,000 and the average collection period
allowed to the customers as 15 days. Find the amount of investment gained and lost when
the return on investment in the business is at 7 percent and borrowings demand an interest at
the rate of 4 percent per annum. The firm has a proposal to expand its sales by extending the
credit days from 15 days to 30 days. Does the proposal worth accepting when increase in
sales is expected as 5 percent. Ignore all other expenses as constant.

GOOD JOB!!!!!!