Question

The following company has sales of $30 million and a cost of goods sold of $18...

The following company has sales of $30 million and a cost of goods sold of $18 million. The balance sheet for period ending 31 December 2019 for this company appears below:

Assets                                                     $000

Liabilities and Shareholder Equity      $000

Cash                                                        2500   

Accounts Payable                                    1600

Accounts Receivable                             4400

Other Payables                                           900

Inventory                                                1500

Accruals                                                     1100

Total Current Assets                            8400

Total Current Liabilities                         3600

Property Plant and Equipment         10500

Long Term Debt                                        2500

Total Assets                                         18900

Total Liabilities                                         6100

Issued Equity                                          12800

Total Liability & Shareholder Equity  18900

a. Calculate the company’s net working capital in 2019.                                     

b. Calculate the company’s cash cycle for 2019.

c. The industry average for accounts receivable is 28 days. What would this company’s cash cycle have been in 2019 if it had matched this industry average for accounts receivable? Comment on this new cash cycle outcome against b. above.

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Answer #1

a.net working capital= current assets- current liabilities

amount in$000

current assets= $8400

current liabilities= $3600

net working capital= 8400-3600= $4800

b. company's cash cycle;

receivable ratio = sales/ trade receivables

sales $30 million

trade receivables= $4400

receivable ratio= 6.8times

average collection period= 365/6.8= 54 days

payable ratio= purchase /trade payables

cogs= $18 million

tader payavles = 3600

payable ratio = 5 times

average payment period= 365/5= 73 days

inventory turnover ratio= cogs/average inventory

cogs= $18 million

closing inventory = 1500

Inventoy turnover ratio = 12 times

average inventory period= 360/12= 30 days

cash cycle = receivable days+inventory days- paaybles days

=54+30-73=11 days

cash cycle = 11 days

c. if inventory daysa re 28 days '

then only that inventoy amount will be changed.

54+28-73= 9 days cash cycle

cash cycle= 9 days

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