Accounting Questions Solutions

Chapter 18

No. 3 Changes in Operating Cycle

Effects of the following on operating cycle

1. Average receivables goes up – Increase (1)
2. Credit repayment times for customer increased – Increase (I)
3. Inventory turnover goes from 3 times to 6 times – Increase (I)
4. Payables turnover goes up from 6 times to 11 times – Decrease (D)
5. Receivables turnover goes from 7 times to 9 times – Increase (I)
6. Payables to suppliers are accelerated – No effect (N)

No. 11 Cash budget

Given the following

	April	May	June
Credit sales	$374,400	$349,500	$420,500
Credit Purchases	148,900	169,300	200,300
Cash disbursements
Wages, taxes, expenses	54340	70,300	75,170
Interest	12,580	12,580	12,580
Equipment purchases	88,800	135,000	0

 Credit sales projected = 5% will never be collected, 35% will be collected, 60% collected the following month. Credit sales to be paid the following month;

            Credit sales = $235,000 March, 2015

            Credit purchases = $161,300, March, 2015

Solution

Sales collected= 0.35 x current month sales + 0.60 x previous month sales.
	April	May	June
Beginning cash balance	$             112,000.00	$               67,020.00	$               47,205.00
Cash receipts
Cash collections from credit sales	272,040.00	346,965.00	356,875.00
Total cash available	$             384,040.00	$             413,985.00	$             404,080.00
Cash disbursements
Purchases	$             161,300.00	$             148,900.00	$             169,300.00
Wages, taxes, and expenses	54,340.00	70,300.00	75,170.00
Interest	12,580.00	12,580.00	12,580.00
Equipment purchases	88,800.00	135,000.00	–
Total cash disbursements	$             317,020.00	$             366,780.00	$             257,050.00
Ending cash balance	$               67,020.00	$               47,205.00	$             147,030.00

Chap. 20

Solution 8

Arizona Company

Calculating average collection period:

            Average collection period = Net Credit term + overdue period

                                                            = 30 + 4 days

                                                            = 34 days

            Receivable turnover (RT) = (365 days/avg. collection period)

                                                = 365 / 34 = 10.74

            Average accounts receivable (AAR) = (annual credit sales/receivable turnover)

                                                            = $9.75 million / 10.74

                                                            = $ 0.908218 million

Chapter 21

No. 4 Using spot and forward exchange rates

 [LO1] Suppose the spot exchange rate for the Canadian dollar is Can$1.09 and the six-month forward rate is Can$1.11.

1. Which is worth more, a U.S. dollar or a Canadian dollar?

Given spot rate = $1.09

            Forward rate = $1.11

USD with CADforward price = CAD$1/(spot price of CAD $/US $1)

                                                = CAD $1 / ($1.09/$1)

                                                = $0.9174 indicating that the US dollar is worthier

• Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.50? Why might the beer actually sell at a different price in the United States?

Spot rate = $1.09

Forward rate = $1.11

Cost of Canadian dollar in US = value of beer in Canada/ (spot price of Canadian dollar/US dollar)

                                    = C$2.50 / (C$1.09/$1)

                                    = $2.29

• Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

Given the fact that the rate of country’s dollar is CAD$1.11 and its spot rate is CAD$1.09 – it shows that the forward markets the US dollar is more expensive than in the spot markets. Consequently, this indicates that the US dollar is trading at a premium when compared to the Canadian dollar. Such an aspect translates to the idea that the value of Canadian dollar is less that of the US dollar.

• Which currency is expected to appreciate in value?

The dollar is expected to appreciate in a future date given the fact that the forward rate for the Canadian dollar is less than its spot rate. Also, the dollar is trading at a premium from the fact that it is cheaper in the spot markets. Therefore, considering this disparity, the dollar is expected to appreciate in the spot markets.

e. Which country do you think has higher interest rates—the United States or Canada? Explain.

Interest rates make the value of a currency to shoot or increase and such a phenomenon induces reduced flow of money in the markets. In this case, the US dollar is more valuable than the Canadian Dollar and this is a good indicator that the US interest rates are higher than those in Canadian markets.