FIN 540 Week 8 Homework Problems
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Week 8
Homework Problems Chapter 28
1. Which of the following would cause
average inventory holdings to decrease, other things held constant?
a. The purchase price of inventory items
decreases by 50 percent.
b. The carrying price of an item decreases
(as a percent of purchase price).
c. The sales forecast is revised downward
by 10 percent.
d. Interest rates fall.
e. Fixed order costs double.
2. During times of inflation, which of
these inventory accounting methods is best for cash flow?
a. LIFO, because the most expensive goods
are recorded as being sold first, resulting in a higher cost of goods sold and
a lower reported net income.
b. Specific identification, because it
correctly identifies the actual item sold and so the actual cost is recorded on
the income statement.
c. Weighted average, because it smoothes
the reported cost of goods sold over time.
d. It doesn't matter which you use since
cash flow is unaffected by the choice of inventory identification method.
e. FIFO, because the cheapest goods are
recorded as being sold first, resulting in lower cost of goods sold and higher
reported net income.
3. Which
of the following is true of the Baumol model? Note that the optimal cash
transfer amount is C*.
a. If the total amount of cash needed
during the year increases by 20%, then C will increase by 20%.
b. If the average cash balance increases
by 20%, then the total holding costs will increase by 20%.
c. If the average cash balance increases
by 20% the total transactions costs will increase by 20%.
d. The optimal transfer amount is the same
for all companies.
e. If the fixed costs of selling
securities or obtaining a loan (cost per transaction) increase by 20%, then C*
will increase by 20%.
4. Which
of the following is true of the EOQ model? Note that the optimal order
quantity, Q, will be called EOQ.
a. If the annual sales, in units,
increases by 20%, then EOQ will increase by 20%.
b. If the average inventory increases by
20%, then the total carrying costs will increase by 20%.
c. If the average inventory increases by
20% the total order costs will increase by 20%.
d. The EOC is the same for all companies.
e. If the fixed per order cost increases
by 20%, then EOQ will increase by 20%.
5.
Halliday Inc. receives a $2 million payment once a year. Of this amount,
$700,000 is needed for cash payments made during the next year. Each time
Halliday deposits money in its account, a charge of $2.00 is assessed to cover
clerical costs. If Halliday can hold marketable securities that yield 5
percent, and then convert these securities to cash at a cost of only the $2
deposit charge, what is the total cost for one year of holding the minimum cost
cash balance according to the Baumol model?
a.
$7,483
b. $187
c.
$3,741
d. $374
e. $748
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