Problem A.

It takes JET Corporation about 7 days to receive and deposit payments from
customers. Therefore, a lockbox system is being considered. It is expected that the system
will reduce the float time to 5 days. Average daily collections are P500,000. The rate of
return is 12 percent. 

1. The reduction in outstanding cash balance is 

Solution:
 2 days * $500,000
= $1,000,000

2. The rate of return that could be earned is 

Solution:
$1,000,000 * 12%
= $120,000

3. The maximum monthly charge that the company should pay for this arrangement is 
Solution:
$120,000/12
= $10,000

Problem B. Barkley Corporation is exploring the use of a lockbox system that will cost
P100,000 per year. Daily collections average P350,000. The lockbox arrangement will
reduce the float period by 2 days. The firm’s rate of return is 15 percent.

 4. The net advantage (disadvantage) of the system is 

Solution:
15% *2 * $350,000 = $105,000
-) Cost = $100,000
Advantage of lockbox = $5,000

Problem C. Every 2 weeks, X Corp. disburses checks that average P500,000 and take 3
days to clear

5. How much money can the company save annually if it delays transfer of funds from
an interest-bearing account  that pays 0.0384 percent per day (annual rate of 14
percent) for those 3 days? 
Solution:

Interest for 3 days is:

$500,000 * (0.000384 * 3)

= P576

No. of 2-week periods in a year:

52 weeks/ 2 weeks

= 26
The savings per year:
P576 * 26
= P14,976

Problem D. The following are the credit terms of a company. 3/15, n/60.  
6. What is the opportunity cost of foregoing the discount? 
Solution:
Opportunity cost = [3/(100-3)] * [(360)/ (60-15)]
= [3/97] * [360/ 45]
= 24.7%

Problem E. You estimate a cash need for P4,000,000 over a 1-month period where the cash
account is expected to be disbursed at a constant rate. The opportunity interest rate is 6
percent per annum or 0.5 percent for a 1-month period. The transaction cost each time you
borrow or withdraw is P100. 

7. Using Baumol Model, the optimal cash balance is 

Solution:
2 bT 2 ( 100 )( 4,000,000 )
C* =
√ √
i
=
0.005
=P 400,000

8. The number of transactions required would be 

Solution:
P4,000,000/P400,000
= 10

Problem F. A service enterprise's working capital at the beginning of January was P70,000. The
following transactions occurred  during January: 
Performed services on account $30,000 
Purchased supplies on account 5,000 
Consumed supplies 4,000 
Purchased office equipment for cash 2,000 
Paid short-term bank loan 6,500 
Paid salaries 10,000 
Accrued salaries 3,500 
9. What is the amount of working capital at the end of January?

WC = Current Assets-Current Liabilities

Solution:
Beginning working capital $70,000 + Performed services on account 30,000 = 100,000

- Consumed supplies 4,000 - Purchased office equipment 2,000 - Paid short-term bank loan 0
；- Paid salaries 10,000 - Accrued salaries -3,500 = Working capital, end of January $80,500
Problem G. A firm purchased raw materials on account and paid for them within 30 days. The
raw materials were used in  manufacturing a finished good sold on account 100 days after the
raw materials were purchased. The customer paid for the  finished good 60 days later.  
 10. The cash conversion cycle is 
Solution:
Cash conversion cycle = days of Inventory outstanding + Days of sales outstanding - Days
payables outstanding
= 100 days + 60 days - 30 days
= 130 days

Problem H. You have recently been hired to improve the performance of Multiplex Corporation,
which has been experiencing  a severe cash shortage. As one part of your analysis, you want to
determine the firm’s cash conversion cycle. Using the  following information and a 360-day year,
what is your estimate of the firm’s current cash conversion cycle? (M) 

Current inventory = $120,000. 

Annual sales = $600,000. 
Accounts receivable = $160,000. 
Accounts payable = $25,000. 
Total annual purchases = $360,000. 
Gross profit rate 30% 
Purchases credit terms: net 30 days. 
Receivables credit terms: net 50 days 
11. The cash conversion cycle is. (181 days)
Solution:
Inventory Conversion period = (Inventory / Total annual purchases) * Days in a year 
= (120, 000/360, 000) * 360  
= 120 days
Average collection period = (Accounts receivable / Annual sales) * Days in a year 
= (160,000/600,000) * 360
= 96 days
Payables deferral period = (Accounts payable / Total annual purchases) * Days in a
year 
= (25,000 / 360,000) * 360
= 25 days
Cash conversion cycle = Inventory conversion period + Average collection period -
Payables deferral period
= 120 + 96 - 25
= 191 days

Problem I. A firm has daily cash receipts of P100,000 and collection time of 2 days. A
bank has offered to decrease the  collection time on the firm’s deposits by two days for a
monthly fee of P500.  
12. If money market rates are expected to average 6% during the year, the net annual
benefit loss) from having this service is 
Solution:
Average cash balance= collection time * daily cash receipt
= 2 days * 100,000
= 200,000
 Firm interest= 200,000 * 6% 
        = 12,000
Net annual benefit loss= 12,000- (500 * 12 month)
  = 12,000 - 6,000
  = 6,000

Problem J. It typically takes Nexus Inc. 8 days to receive and deposit customer remissions.
Nexus is considering a lockbox  system and anticipates that the system will reduce the float time
to 5 days. Average daily cash receipts are P220,000. The rate of  return is 10 percent. 
13. What is the reduction in cash balances associated with implementing the system?  
Solution:
= ( 8 days - 5 days) * 220,000
= 3 days * 220,000
= 660,000

14. What is the rate of return associated with the earlier receipt of the funds? 
Solution:
= 660,000 * rate of return
= 660,000 * 10% 
= 66,000

15. What should be the maximum monthly charge associated with the lockbox proposal? 
Solution:
= 66,000 / 12
= 5,500

Problem K. Proxy Company turns out 200 flash drives a day at a cost of P300 per drive for
materials and variable conversion  cost. It takes the firm 18 days to convert raw materials into
flash drives. Proxie’s usual credit terms extended to its  customers is 30 days, and the firm
generally pays its suppliers in 20 days.  
16. If the foregoing cycles are constant, what amount of working capital
must Proxy Company finance?
Solution:
Working capital= COGS * operating cycle
 = (200 * 300) * 365
 = 60,000 * 365
 = 21,900,000
18 days / 365 = 0.049
21,900,000 * 0.049 = 1,073,100

 Problem L. The cost of a given product is 40 percent of selling price, and carrying cost
is 12 percent of selling price. On  average, accounts are paid 90 days subsequent to the
sale date. Sales average $40,000 per month.
 17. The investment in accounts receivable from this product is 
Solution:
Accounts receivable = Sales date * Sales average 
= 3 months (90 days) * 40,000
= 120,000
 Investment in accounting receivable= Accounts receivable x (given product
percent + carrying cost percent) 
= 120,000 * (0.4 + 0.12)
= 120,000 * 0.52
= 62,400

Problem M. If a company’s credit sales are $120,000, the collection period is 60 days, and
the cost is 80 percent of sales price,  18. what are (a) the average accounts receivable
balance and (b) the average investment in accounts receivable? 
Solution:
Accounts receivable turnover= 360/60 = 6
Average account receivable balance= credit sales/ turnover
                = 120,000/ 6
                = 20,000
Average investment in accounts receivable = 20,000 * 80%
             = 16,000

Problem N. Lakeside Corporation provides the following data: 

Current annual credit sales $12,000,000 
Collection period 2 months 
Terms net/30 
Rate of return 15% 
Lakeside proposes to offer a 3/10, net/30 discount. The corporation anticipates 25 percent of
its customers will take advantage of the discount. As a result of the discount policy, the
collection period will be reduced to 1.5 months. 

     19. What is the advantage (disadvantage) of this decision?  

The discount policy is disadvantageous.

Problem O. The Sales Director of Go Company suggests that certain credit terms be modified.
He estimates the following effects: 
∙ Sales will increase by at least 20%. 
∙ Accounts receivable turnover will be reduced to 8 times from the present turnover of
10 times. 
∙ Bad debts, now at 1% of sales will increase to 1.5% Sales before the proposed
changes is at P900,000. Variable cost ratio is 55% and desired rate of return is 20%
Fixed expenses amount to P150,000. 

20. What is the advantage (disadvantage) of this decision? 

Problem P. Red Company’s budgeted sales for the coming year are P96 million, of which 80%
are expected to be credit  sales at terms of n/30. The company estimates that a proposed
relaxation of credit standards would increase credit sales by  30% and increase the average
collection period from 30 days to 45 days.  
21. Based on a 360-day year, the proposed relaxation of credit standards would result to
an accounts receivable balance  of 
Credit sales = 96,000,000 * 80%
=P 76,800,000
Average balance in receivables = 76,800,000 * (30 / 360)
= P 6,400,000
Credit sales (increase 30%) = 76,800,000 * 130%
= P 99,840,000
New average balance in receivables = 99,840,000 * (45 / 360)
= P 12,480,000
Expected increase in the balance = 12,480,000 - 6,400,000
= P 6,080,000

Problem Q. Blue Inc. sells on terms of 3/10 net 30 days. Gross sales for the year are
P2,400,000 and the collections  department estimates that 30 percent of the customers pay on
the tenth day and take discounts; 40 percent pay on the  thirtieth day; and the remaining 30
percent pay, on the average, 40 days after the purchase.  
22. Assuming 360 days per year, what is the average collection period?
Solution:  
= (0.3 *10) + ( 0.40 * 30)+(0.30 * 40)
= 3+12+12
= 27 days 

Problem R. The Yellow Company’s budgeted sales for the coming year are P30 million of which
80% are expected to be  made on credit. The company wants to change its credit terms from
n/30 to 2/10, n/30. If the new credit terms are adopted, the company estimates that cash
discounts would be taken on 40% of the credit sales and the uncollectible amount  would be
unchanged.  
23. The adoption of the new credit terms would result in expected discount
availed of in the coming year of 
Solution:
(P30,000,000 * 80% * 40% * 2%) = P192,000

Problem S. Over the past few years, the marketing department at Goldston & Co has
convinced the finance  department to permit credit sales to increasingly marginal customers.
Revenue has risen as a result, but bad debts  are now at 6% of sales. Finance has suggested
that credit policy be tightened to reduce bad debt losses. Their  proposal calls for a more
restrictive policy under which sales would fall by 8% but bad debt losses would drop to  2.6% of
revenue. Under the current policy Golston’s revenue forecast is $400 million with a contribution
margin of  38%. Implementing the new credit policy wouldn’t have an effect on contribution
margin but would require an  additional $500,000 in annual fixed costs.  
     24. Should Goldston implement finance’s new credit policy? 
25. Should the new policy be implemented if bad debts only are only expected to drop to
4% of revenues?