Question

Green Melon Electronics Company's management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company's management expects that it will take 60 days to manufacture and sell its products and 50 days to receive payment from its customers. Green Melon's CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 110 days.
Which of the following responses to the CFO's statement is most accurate?

a. The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time.
b. The CFO's approximation of the length of the bank loans should be accurate, because it will take 110 days for the company to manufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank.

Setting and implementing a credit policy is important for three main reasons:
1. It has a major effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses.
2. It has a minor effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses.

Answer 1

Answer: a. The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time.

1. It has a major effect on sales, it influences the amount of funds tied up in receivables, and it affects bad debt losses.

Explanation:

A. Since the company's management expects that it will take 60 days to manufacture and sell its products and 50 days to receive payment from its customers, while Green Melon's CFO informed the rest of the management team that they should expect the length of the bank loans to be approximately 110 days, then it can be inferred that the CFO is not taking into account the amount of time the company has to pay its suppliers.

2. Setting and implementing a credit policy is important because it has a major effect on sales, nfluences the amount of funds tied up in receivables, and it also affects bad debt losses.