Question

In: Finance

1. Suppose that ABC Inc. is able to decrease its collection float time on all credit...

1. Suppose that ABC Inc. is able to decrease its collection float time on all credit sales by 4 days. What effect would this have on the present value of ABC's credit sales, all else being equal?

The present value of ABC's credit sales will increase.

The present value of ABC's credit sales will decrease.

The present value of ABC's credit sales will remain constant.

Cannot be determined.

2. Jones Inc. sent a payment to its supplier on 8/25/18, but the supplier does not receive their money until 8/31/18. All else being equal, this delay decreases the present value of the payment from the supplier's perspective.

True

False

3. The goal of an organization is to maximize net income.

True

False

4.Which of the following will occur on the company's balance sheet as a result of the first credit sales not due until 2 months from now?

The cash account will increase and an accounts payable entry will be created.

The cash account will decrease and an accounts receivable entry will be created.

The cash account will be unaffected and an accounts receivable entry will be created.

The cash account will be unaffected and an accounts payable entry will be created.

PLEASE EXPLAIN, thank you.

Expert Solution

1)
Correct option: The present value of ABC's credit sales will increase.

Explaination: The decrease in days by 4 days shall lead to a lower discounting and therefore lead to a higher present value.
2nd option is wrong as that would lead to a lower present value
3rd option is wrong as there shall be change in present value due to change in float
last option is wronga s it can be determined as present value is invesrely proportional to float.

2) True as the payment is received later on. If it were received earlier it could have been invested somewhere and should have earned some interest which would have increased present value.

3) False: The goal of an organization is to maximize value or shateholders wealth.

4) Since the sale is credit there shall be no affect in cash account as no cash is received.
Now since the sale is credit there shall be accounts receivable and since this is first credit sale, accounts receivable entry will be created.

Hence third option is correct:

The cash account will be unaffected and an accounts receivable entry will be created.

jeff jeffy answered 2 years ago

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