CLASS TEST – CASH MANAGEMENT

QUESTION 1
1.1 When inventory order costs decrease…
a. the economic order quantity will decrease.
b. the re-order level will increase.
c. the economic order quantity will increase.
d. the economic order quantity will not be affected.

1.2 When inventory carrying costs increase…

a. the economic order quantity will increase.
b. the total order cost will increase.
c. the economic order quantity will decrease.
d. the economic order quantity will not be affected.

1.3 A just-in-time purchasing system often results in…

a. higher carrying costs.
b. a decrease in the number of suppliers.
c. a decrease in the number of deliveries from the supplier.
d. a higher need for inspection of inventory as the inventory arrives.

1.4 A spontaneous source of financing will be…

a. shareholders’ equity.
b. long-term debt.
c. prepaid interest.
d. trade credit.

1.5 Repurchased agreements consist of…

a. accounts payable.
b. ordinary equity.
c. bonds.
d. prepaid rent.

1.6 The credit applicant’s _________ is the amount of assets the applicant has
available for use in securing the credit.
a. condition.
b. character.
c. collateral.
d. capital.

1.7 The following is not a reason for a company to hold cash:

a. to pay for operating expenses.
b. to pay for unexpected losses.
c. to pay for inventory where a supplier allows a large once-off cash discount at
the end of the year.
d. to pay for unexpected drawings by the owner of the company.
1.8 EFTs are more commonly used to…
a. commit fraud.
b. pay creditors to avoid cheque fraud.
c. avoid bank charges.
d. better one’s creditworthiness.

1.9 3/10 net 30 translates as…

a. 10 percent cash discount if paid in 3 days, net 30-day credit period.
b. 30 percent of the account is due in 10 days, payment prior to day 10 receives
a 3 percent discount.
c. 3 percent cash discount if paid prior to 10 days, if the customer does not take
a cash discount, the balance is due in 30 days.
d. 3 percent of the balance is due in 10 days, and the remaining balance is due
in 30 days.

1.10 Which one of the following statements regarding the use of short-term
financing is not correct?
a. Upward sloping in interest rate yields means a higher interest rate.
b. Lower levels of credit checks are done.
c. Short-term interest rates are more volatile than long-term interest rates.
d. Seasonal traders can match their financing requirements with the right type of
financing instrument.

1.11 Promo Ltd uses 95 760 units of ZAB112 in manufacturing activities over a
360-day work year. The usual delivery time is six days, but on occasion, the delivery
can take up to eight days. The safety stock level amounts to…
a. 532 units.
b. 266 units.
c. 1 596 units.
d. 1 862 units.

1.12 Promo Ltd uses 95 760 units of ZAB112 in manufacturing activities over a
360-day work year. The cost of placing and processing one order is R255 and the
cost of carrying one unit per year is R12. The economic order quantity is …
a. 1 427 units.
b. 266 units.
c. 95 units.
d. 2 017 units.
1.13 Promo Ltd uses 110 000 units of ZAB112 in manufacturing activities over a
360-day work year. The cost of placing and processing one order is R250 and the
cost of carrying one unit per year is R15. The economic order quantity is 1 915 units.
The total order cost for the year is…
a. R28 725.
b. R14 360.
c. R478 750.
d. R244 163.

1.14 Promo Ltd uses 110 000 units of ZAB112 in manufacturing activities over a
360-day work year. The cost of placing and processing one order is R250 and the
cost of carrying one unit per year is R15. The economic order quantity is 1 915 units.
The total carrying cost for the year is…
a. R28 725.
b. R14 363.
c. R825 000.
d. R15 725.

1.15 The opportunity cost of foregoing the discount of 2/10, net 45 is…
a. 21.28%.
b. 16.55%.
c. 20.86%.
d. 16.22%.

1.16 The opportunity cost of foregoing the discount of 3/15, net 45 is…
a. 36.50%.
b. 25.09%.
c. 37.63%.
d. 24.33%.

1.17 Bottle-it Ltd is a large company producing wines for export purposes. The
company is issuing a three-month (90 days) bill, accepted by the bank, with a
face value of R1 000 000 for R980 000. The annual interest rate implicit in this
bank bill is…
a. 9.02%.
b. 8.28%.
c. 8.11%.
d. 8.67%.
1.18 Bottle-it Ltd is a large company producing wines for export purposes. The
company is issuing a three-month (90 days) bill, accepted by the bank, with a
face value of R1 500 000 for R1 450 000. The annual effective interest rate
implicit in this bank bill is…
a. 14.74%.
b. 13.98%.
c. 14.52%.
d. 14.08%.

1.19 Customers currently take 60 days credit. The company is considering offering
a 3% discount for payment within 20 days. The company is selling R2 million
a year and is currently paying the overdraft interest at 20%. The company…
a. should offer the discount, as the cost of trade debtor finance by offering the
discount will cost the company less than the bank overdraft interest.
b. should keep with the current credit policy, as the cost of trade debtor finance
by offering the discount will cost the company more than the bank overdraft
interest.
c. can consider either option as it will not have any effect on the cost of credit.
d. should not choose any of these options.

1.20 Customers currently take 3 months’ credit. The company is considering

offering a 2% discount for payment within 1 month. The company is selling R2
million a year and is currently paying the overdraft interest at 20%. The
company…
a. should offer the discount, as the cost of trade debtor finance by offering the
discount will cost the company less than the bank overdraft interest.
b. should keep with the current credit policy, as the cost of trade debtor finance
by offering the discount will cost the company more than the bank overdraft
interest.
c. can consider either option as it will not have any effect on the cost of credit.
d. should not choose any of these options.
QUESTION 2
Promo Company is considering changing its credit terms from 3/15 net 30 to 4/10 net
40 in an effort to boost sales. All sales are on credit. With the current credit policy,
50% of customers make use of the discount. It is expected that 60% of customers
will make use of the discount with the new credit policy. According to the current
credit policy, 8% of credit sales result in bad debts, whereas with the new credit
policy, only 4% of credit sales are expected to result in bad debts. Management
expects that the new proposed credit policy is likely to increase the annual sales of
R800 000 by 12.5%. It is estimated that the gross profit margin will remain
unchanged at 20% and the opportunity cost is 12%.

Required
Calculate whether the new credit policy should be accepted or not, using 365 days
as the number of days in the year.

QUESTION 3
Trifecto Company sells goods for cash only but is now considering selling on credit.
The proposed credit terms are for customers to pay within 60 days after the month of
sales. The change in policy from cash to credit is expected to increase the current
monthly sales of 1 000 units by 15%. The selling price stays constant at R300 per
unit with a contribution mark-up of 20% on cost. The interest rate is 1% per month.
The company is not expecting any bad debts due to its stringent credit analysis of
customers. Assume the current date is 1 April and all cash sales occur at the end of
each month which means that by offering credit, sales are expected to be collected
at the end of June.

Required
Determine on the basis of NPV analysis whether the company should switch to credit
sales.
QUESTION 4
Crowbar Company shows the following actual and budgeted sales, which have been
extracted from the components of the master budget:
Actual sales
January R200 000
February R230 000
March R210 000
Budgeted sales
April R260 000
May R250 000
June R265 000

Based on past experience, sales are normally received in the following manner:
 20% of the sales are cash sales and are subject to a 5% cash discount.
 The remaining sales are collected in equal amounts during the following two
months, starting in the month after the month of sale.

Purchases of inventory are made in the month of sale and are equal to 60% of sales.
All purchases are on credit. Seventy-five per cent of the purchases must be paid
within the first month after the month of purchase and the balance is paid in the
second month after the month of purchase.

According to the labour budget, salaries and wages are R60 000 per month. In May
the employees will receive a R10 000 once-off bonus on the completion of a project.

According to the overheads budget, selling expenses are 1% of total sales and are
paid in the month they incurred. Monthly rent expenses are R12 000. The monthly
administrative and other expenses of R5 000 include depreciation of R1 000.

In April, a provisional tax payment of R25 000 is to be made.

Crowbar Company had a positive bank balance of R22 325 at the end of March. It is
the policy of the company to maintain a minimum bank balance of R20 000. Any
shortfall below the minimum bank balance is to be taken out as short-term financing
at the end of the month with an interest rate of 12% per annum payable monthly. Any
amount above the minimum cash balance is to be used to repay the short-term debt
if there is any.

Required
Prepare the monthly cash budget for Crowbar Company for April and May.