Question

Atlantic Northern Inc. currently has $620,000 in accounts receivable and generated $4,350,000 in sales (all on credit) during the year that just ended. The firm’s days sales outstanding (DSO) is_______days. Use 365 days as the length of a year in all calculations.

A.) 52.02 C.) 39.02

B.) 49.42 D.) 57.22

Atlantic Northern Inc.’s CFO is unhappy with its DSO and wants to improve collections next year. Sales are expected to grow by 13% next year, and the CFO wants to lower the DSO to the industry average of 30 days. How much accounts receivable is the firm expected to carry?

A.) $484,817 C.) $525,218

B.) $383,813   D.) $404,014

The AFN equation and the financial statement–forecasting approach both assume that assets grow at relatively the same rate as sales. However, the relationship between assets and sales is often a little more difficult than that. In particular, some firms use regression analysis to predict the required assets needed to support a given level of sales.

Incom Corp. has used its historical sales and asset data to estimate the following regression equations:

Accounts Receivable	=	–$99,220 + 0.249(Sales)
Inventories	=	$9,900 + 0.192(Sales)

Incom Corp. currently has sales of $900,000, but it expects sales to grow by 30% over the next year. Use the regression models to calculate Incom Corp.’s forecasted values for accounts receivable and inventories needed to support next year’s sales.

Forecasted Values for Next Year
Accounts receivable	A.) $192,110 B.) $182,505 C.) $230,532 D.) $211,321
Inventories	A.) $234,540 B.) $222,813 C.) $199,359 D.) $257,994

Based on the next year’s accounts receivable and inventory levels predicted by Incom Corp.’s regression equations, the firm’s DSO for next year is expected to be________. Use 365 days as the length of a year in all calculations.

A.) 59.93 Days C.) 44.95 Days

B.) 56.93 Days D.) 50.94 Days

Several factors affect a firm’s need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm’s need for external capital—that is, its AFN (additional funds needed). Choose all that apply.

A.) The firm’s forecasted sales are unexpectedly increased.

B.) The firm improves its production system and increases its profit margin.

C.) Management has decided that the firm needs to keep more inventory on hand throughout the year.

Accounts payable and accrued liabilities represent obligations that the firm must pay off. Assuming everything else holds constant, if they increase, the firm’s AFN will_______.

A.) Increase B.) Decrease

Answer 1

DSO = 365*Accounts receivables/Credit sales

= 365*620,000/4,350,000

= 52.02 days

i.e. A

Accounts receivables = 30*4,350,000*1.13/365

= $404,014

i.e. D

Accounts receivables = -99220 + 0.249*900,000*1.3

= $192,110

i.e. A

Inventory = 9900 + 0.192*900,000*1.3

= $234,540

i.e. A

DSO = 365*192110/1170,000

= 59.93 days

i.e. A

A.) The firm’s forecasted sales are unexpectedly increased.

C.) Management has decided that the firm needs to keep more inventory on hand throughout the year.

Increase in profit margin will lead to a decrease in AFN

B. Decrease