Chapter 7 Discussion Questions:
1. The primary concern should be for safety and liquidity rather than maximization of profit because they help meet the necessities of the firm when it comes to the firm’s transactions. This money must be available when it is needed. 2. Lockbox systems and regional collection offices both make the process of checks coming from a far location faster. The difference between the two is that lockbox systems only require the use of a post office box and a local bank. It clears checks at a lower cost. 3. A manager would want to slow down disbursements because it allows the company to hold on to their cash balances for as long as possible. 5.
Treasury bills are a good place for financial managers to invest excess cash because they trade on a discount base and because they trade on a large and active market, which provides the most liquidity for the firm. 6. The key consideration when looking at the bad debt percentage of a company would be whether the company has enough return on capital to cover the debt it accumulates. This is what should be measured as the success in the management of accounts receivable. 7. The three quantitative measures that can be applied to the collection policy of the firm are the ratio of bad debts to credit sales, the aging of A/R and the average collection period. 8. The 5 C’s of credit are character, capital, capacity, conditions and collateral. 9. The economic ordering quantity tells us the most advantageous amount for the firm to order each time. This is the point that a firm can no longer hope to achieve lower costs. The assumption that is made about the usage rate for inventory is that it will be used up at a constant rate over time. Average inventory is half of the order size. 10. A firm would keep a safety stock because it protects the risk of the firm running out of a specific inventory item and is unable to sell or deliver the product. The carrying cost will...
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