Practice Problem:


1. If the average age of inventory is 60 days, the average age of the accounts payable is 30 days, and the average age of accounts receivables is 45 days, the number of days in the cash flow cycle is

2. The following data are taken from the records of Apple Corporation for the year ended December 31, 200B:
Net credit sales	576,000
Average materials inventory	8,000
Average finished goods inventory	12,000
Average accounts receivable	80,000
Average accounts payable	5,000
Net credit purchases	120,000
Raw materials used	96,000
Gross profit rate	25%
What is the average number of days in the company’s operating cash conversion cycle? (use a 360-day year)


Questions 3 & 4 are based on the following information
Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. 

3. What is the length of the company’s inventory conversion period?

4. What is the length of the company’s cash conversion period?

5. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable conversion cost.  It takes the firm 18 days to convert raw materials into calculator.  Casie’s usual credit terms extended to its customers is 30 days, and the firm generally pays its suppliers in 20 days.  If the foregoing cycles are constant, what amount of working capital must Casie Company finance?

6. Assume that each day a company writes and received checks totaling P10,000. If it takes 5 days for the checks to clear and be deducted from the company’s account, and only 4 days for the deposits to clear, what is the float?

7. Annabelle Corporation is engaged in a multi-level marketing business that presently requires all sales agents to mail checks to its Manila office. An average of three days is required for mailed checks to be received, one day for Annabelle Corporation to process them and three days to clear through its banks.

The company's treasurer proposed a change in the system, where the checks will no longer be mailed to Manila office. Instead, checks collected will be deposited on-line in any branch of the company's depositary bank, and the deposit slips, as well as the other pertinent documents will be sent by fax or e-mail to the Manila office on the same day. The original deposit slips and other documents will be submitted by the sales agents to Manila when they attend the Sales Agents' Monthly Meeting.
The new system will eliminate the mailing float and the processing time. Annabelle Corporation has an average daily collection of P50,000. 
If the new system is implemented, Annabelle Corporation's average cash balance will increase by

8. A firm has a daily cash receipts of P100,00 and collection time of 2 days. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of P500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is

9. What are the expected annual savings from a lock-box system that collects 150 checks per day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7%?

10. Average daily cash outflows are P3 million for Evans, Inc, A new cash management system can add two days to the disbursement schedule. Assuming Evans earns 10 percent on excess funds, how much should the firm be willing to pay per year for this cash management system?