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Assessing How Well Companies Manage Their - Essay Example

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Hickory Company is managing its receivables better in 2006 than it did in 2005. The accounts receivable turnover ratio is higher in 2006 than in 2005. This means that the company is using its asset-average net receivables more effectively in 2006 than it did in 2005…
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Exercise 7-17 Assessing How Well Companies Manage Their Accounts receivable turnover ratio = Net sales/Average net receivables Average collection period = 365 X 1/Accounts receivable turnover ratio
Accounts receivable turnover ratio = 1,425,000/[(375,000+420,000)/2]
= 3.5849
Average collection period = 365 X 1/3.5849
= 101.8 days
Accounts receivable turnover ratio = 1,650,000/[(333,500+375,000)/2]
= 4.6577
Average collection period = 365 X 1/4.6577
= 78.4 days
Hickory Company is managing its receivables better in 2006 than it did in 2005. The accounts receivable turnover ratio is higher in 2006 than in 2005. This means that the company is using its asset-average net receivables more effectively in 2006 than it did in 2005. One dollar of average net receivables generates sales of $4.66 in 2006, compared to $3.58 in 2005. Also, the average collection period is shorter in 2006 than it was in 2005. The company takes only 78.4 days to collect money from its debtors, as compared to 101.8 days in 2005.
Chapter 19:Quiz Problem 1
1. Paying out a $2 million cash dividend.
Cash decreases by $2 million Net working capital no change
2. A customer paying a $2,500 bill resulting from a previous sale.
Cash increases by $2,500 Net working capital no change
3. Paying $5,000 previously owed to one of its suppliers.
Cash decreases by $5,000 Net working capital no change
4. Borrowing $1 million long-term and investing the proceeds in inventory.
Cash no change Net working capital increases by $1 million
5. Borrowing $1 million short-term and investing the proceeds in inventory
Cash no change Net working capital no change
6. Selling $5 million of marketable securities for cash.
Cash increases by $5 million Net working capital no change
Chapter 19: Practice Problem 14
If a firm pays its bills with a 30-day delay, 2/3 of its purchases will be paid for in the current quarter. 5/6 of its bills will be paid for in the following quarter. If its payment delay is 60 days, 1/3 of its purchases will be paid for in the current quarter. 2/3 of its bills will be paid for in the following quarter.
Chapter 20 Quiz problem 4.
Additional interest income from 2 days saved in collection float
240(400 X $2,000 X 2 X .015%)
Less Bank's charge for operating the lock boxes
160(400 X $.40)
If the lock box saves 2 days in collection float, it is worthwhile to adopt the system as the contribution of the lock box is $80 per day.
2. Let x be the reduction in the time to collect and process each check. For it to be worthwhile for the lock-box system to be used,
400 X $2,000 X x X .015% >= 400 X $.40
120x >= 160
x >= 1 1/3
The minimum reduction in the time to collect and process each check is 1 1/3 to justify the use of the lock-box system.
Case 7-3 Credit Policy Review. Ch. 7:
Sales Manager's Proposal - Looser Credit Policies
Vice President's Proposal - Consumer Credit Cards
Increase in credit sales
600,000($3,000,000 X 20%)
1,200,000($3,000,000 X 40%)
Less Increase in uncollectible accounts receivable
Less Credit card finance charges
48,000($3,000,000 X 40% X 4%)

The vice president's proposal of accepting consumer credit cards yields a higher contribution of $1,152,000 as compared to the sales manager's proposal of looser credit policies that yields a contribution of only $590,000. Therefore, Moorer Corporation would be better off under the vice president's proposal. Credit sales should not be abolished. Though credit sales would result in uncollectible accounts receivable, abolishing credit sales altogether would result in lost sales that might be more than the uncollectible accounts receivable. This is because it is common practice nowadays, especially in the sale of luxury consumer goods.
Problem 21-5 JIT Inventory
1. John Burton should develop a JIT inventory system. A JIT inventory system reduces in-process inventory and its associated cost (Just in time, n.d.). JIT manufacturing means making a good or service only when the customer, internal or external, requires it (Atkinson et al., 1996). The process is driven by a series of signals, or Kanban, that tell production processes to make the next part. Kanban are usually simple visual signals, such as the presence or absence of a part on a shelf. New stock is ordered when stock reaches the re-order level. This saves warehouse space and costs (Just in time, n.d.). Besides, if neither of Penman's two competitors uses a JIT inventory system, the use of one by Penman will give it a competitive advantage. Lastly, most of Penman's employees are trained to do only one job. This is critical to JIT success (Spencer and Guide, 1995). The union should be assured that the implementation will not result in job loss and made to see the benefits of a JIT inventory system, such as job satisfaction and flexibility. Job satisfaction results when supplies continue around the clock keeping workers productive. Flexibility results when employees are utilized in periods of high demand and do not need to work in period of low demand (Just in time, n.d.).
2. The four possible performance measure that John could use to evaluate the effectiveness of the system are defect rates, cycle times, percentage of time that deliveries are on time, and order accuracy (Atkinson et al., 1996). Defect rate is the fallout rate, parts per million (ppm), of all components in manufacturing and assembly that fail quality tests at any point in the production process (Glossary of manufacturing terms, n.d.). Cycle time is the length of time from the start of production and assembly operations for a particular finished product to the completion of all manufacturing, assembly, and testing for that product or specific customer order (Glossary of manufacturing terms, n.d.). The percentage of time that deliveries are on time is the percentage of time that products ordered by customers are received by the specified time or date (Glossary of manufacturing terms, n.d.). Order accuracy means that the goods delivered confirm to order specifications, such as quantity, color, and grade.
Atkinson, A., Banker, R., Kaplan, R., & Young, M.S. (1996). Management accounting. New Jersey: Prentice Hall.
Glossary of manufacturing terms. (n.d.). Retrieved October 21, 2006, from
Just in time. (n.d.). Retrieved October 21, 2006, from
Spencer, M.S., & Guide, V.D. (1995). An exploration of the components of JIT: case study and survey results. International Journal of Operations & Production Management, 15(5), 72-83. Read More
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