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Chapter 3: 1DQ (page 182)

Explain how rapidly expanding sales can drain the cash resources of a firm.

Short Answer

Expert verified

Rapid expansion in sales will require an organization to invest more in assets for supporting the growth and this will draincash resources.

Step by step solution

01

Meaning of cash resources

Cash resources refer to the cash and cash equivalents held by an entity. These resources include cash balance, bank balance, marketable securities, and any other cash equivalent asset held by the entity.

02

The impact of increased sales on the cash resources

The sales expansion will require acompany to hold more inventory for meeting the increased sales demand and this will require the company to increase its current assets. The increased investment in these current investments will decrease the cash resources of the company.

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Most popular questions from this chapter

Charming Paper Company sells to the 12 accounts listed here:

Account

Receivable balance outstanding

Average age of account over the last year

A

\(60,800

22

B

\)168,000

43

C

\(78,300

19

D

\)24,300

55

E

\(58,900

42

F

\)238,000

39

G

\(30,400

16

H

\)374,000

72

I

\(41,400

32

J

\)96,500

58

K

\(292,000

17

L

\)67,700

37

Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.

The current prime rate is 15.5 percent, and Capital charges 4.5 percent over prime to Charming as its annual loan rate.

a. Determine the maximum loan for which Charming Paper Company could qualify.

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Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds?
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