1.Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives forty days of credit on its purchases from suppliers.
a.Estimate the average length of the firm’s short-term operating cycle. How often would the cycle turn over in a year?
b.Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?
3.Obtain a current issue of the Federal Reserve Bulletin, or review a copy from the Fed’s Web site ( http:// www. federalreserve. gov) or the St. Louis Fed’s Web site ( http:// www. stlouisfed. org), and determine the changes in the prime rate that have occurred since the end of 2000. Comment on any trends in the data.
4.Compute the effective cost of not taking the cash discount under the following trade credit terms:
a.2/10 net 40
b.2/10 net 50
c.3/10 net 50
d.2/20 net 40