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Chapter 3: Q7BP (page 221)

Knight Roundtable Co. has annual credit sales of $1,080,000 and an average collection period of 32 days in 2008. Assume a 360-day year. What is the company鈥檚 average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period

Short Answer

Expert verified

The average accounts receivables balance is $96,000.

Step by step solution

01

Information provided in the question

Credit sales = $1,080,000

Average collection period = 32 days

Number of days in a year = 360

02

Calculation of average accounts receivables

The average accounts receivables will be $96,000.

Averagedailycreditsales=AnnualcreditsalesNumberofdaysinayear=$1,080,000360=$3,000

Averageaccountsreceivable=Averagedailycreditsales脳Averagecollectionperiod=$3,000脳32days=$96,000

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Most popular questions from this chapter

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

c. If the total cost of the new system is $400,000, should it be implemented?

What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear鈥檚 earnings before interest and taxes are \)240,000. Determine Lear鈥檚 earnings after taxes under this financing plan. The tax rate is 30 percent.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $240,000. What will be Lear鈥檚 earnings after taxes? The tax rate is 30 percent.

c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month鈥檚 production is equal to annual sales (in units) divided by 12.

Of each month鈥檚 sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

c. Determine a cash payments schedule for January through December. The production costs of \)2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $45,000 per month.

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6.

1-year T bill at the beginning of year 1

5%

1-year T bill at the beginning of year 2

8%

1-year T bill at the beginning of year 3

7%

1-year T bill at the beginning of year 4

10%
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