Question

Shown below are selected financial accounts of RAM Corp. as of December 31, Year 1:


The following additional information is available for Year 1:


RAM Corp. anticipates growth of 10% in sales for the coming year. All corresponding revenue and expense items are expected to increase by 10%, except for depreciation, which remains the same. All expenses are paid in cash as incurred during the year. Year 2 ending inventory is predicted at $150,000. By the end of Year 2, the company expects a notes payable balance of $50,000 and no accrued taxes. The company maintains a minimum cash balance of $50,000 as a managerial policy.

Required:
Consider each of the following circumstances separately and independently of each other and focus only on changes described. (Hint: Prepare an analysis of cash needs (cash forecast) for Year 2, and then calculate the effect of each of these three separate alternative scenarios.)
a. RAM is considering changing its credit policy. This change implies ending accounts receivable would represent 90 days of sales. What is the impact of this policy change on RAM's current cash position? Will the company be required to borrow?
b. RAM is considering a change to a 120-day collection period based on ending accounts receivable. What is the effect(s) of this change on its cash position?
c. Suppliers are considering changing their policy of extending credit to RAM to require payment on purchases within 60 days; there would be no change in RAM's collection period. What is the effect(s) of this change on its cashposition?


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  • CreatedJanuary 22, 2015
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