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FI515_Homework7_BrianLin - Brian Lin D01278742 Week 7...

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Brian Lin D01278742 Week 7 Homework Chapter 16 Questions Problem 16-1 Williams & Sons last year reported sales of $10M and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 5 while maintaining the same level of sales, how much cash will be freed up? Sales = $10,000,000 Sales/Inventory = Inventory Turnover Ratio = 2 Sales/Inventory = 2 Inventory = Sales/2 Inventory= $10,000,000/2 Inventory = $5,000,000 Increased Sales/Inventory = 5 $10,000,000/5 = $2,000,00 Cash Freed Up = $5,000,000 – $2,000,000 = $3,000,000 Problem 16-2 Medwig Corp has a DSO of 17 days. The company averages $3,500 in credit sales each day. What sit he company’s average accounts receivables? DSO = Receivables/(Sales/365) 17 = Receivables/(3,500) Receivables = 17* (3,500) Receivables = $59,500 Problem 16-3 What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30? Terms of 3/15, net 30 = 3% discount if paid within 15 days of invoice date, but the full invoice is due and payable within 30 days if the discount is not taken.
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