PROBLEM $10-3$

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

What$-$If Analysis of Changes in Credit Policy

Cash

$ $80,000$

Account Receivable

$150,000$

Inventory

$65,000$

Accounts payable

$$130,000$

Notes payable

$35000$

Accrued taxes

$20000$

Fixed assets.

$200000$

Accumulated depreciation........

$45000$

Capital stock.

$200000$

The following additional information is available for Year $1$:

Sales

$$800,000$

Depreciation

$$25,000$

Net income

$20000$

Cost of sales $($excludes depreciation$).$

$520,000$

Purchases.

$350,000$

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 cash position?

CHECK:

$($a$)$ Cash excess, $$33,500$

$($c$)$ Cash needed, $$46,000$