PO Question

01.
Calculate the length of the working capital cycle from the following information: Raw Materials holding period Receivables collection period Average time to pay suppliers Finished goods inventory holding period Production cycle 10 days 60 days 45 days 20 days 5 days
02.
A companys annual sales are $8 million with a mark-up on cost of 60% it normally settles payables two months after purchases are made, holding one months worth of demand in inventory. It allows receivables 1 months credit its cash balance currently stands at $ 1,250,000. Calculate its current and quick ratios?
03.
A Company has a quick (or acid test) ratio of 0.80:1. State whether the quick ratio would increase or decrease in each of the following situations. (Take each situation individually, not together.) a) It receives payment of an amount owed by a trade customer. b) It sells an item of inventory at a loss c) It pays an invoice from a trade supplier.
04.
Marlboro Co estimates the following figures for the coming year. Sales- all on credit Average receivables Gross profit margin* Finished goods Work in progress Raw materials (balance Held) Trade Payables Inventory levels are constant. * Raw materials are 80% of cost of sales- all on credit. $ 3,600,000 $ 306,000 25% on sales $ 200,000 $ 350,000 $ 150,000 $ 130,000
Required Calculate the cash operating cycle.
05. Identify which of the following transactions will result in an increase in working capital: A. Writing off a debt as uncollectable
B. Paying the invoice of a trade supplier C. Selling goods on credit at a profit D. Buying inventory for cas 20X7 $000 06.Non Current asstes (carrying value) Current assets: Inventory Receivables Bank Total assets Equity and liabilities Ordinary share capital (50 cent shares) Share premium account Revaluation reserve Profit and loss account Non- current liabilities 5% secured loans notes 8% Preference shares ($ 1 shares) Current liabilities Trade payables Taxation Total equity and liabilities 42 29 3 74 204 35 17 10 31 93 40 25 36 10 46 204 55 10 65 204 $000 130 $000 37 23 5 65 204 35 17 22 74 40 25 20X6 $000 139
20X7 $000 Sales Opening inventory Purchases Closing inventory 37 162 199 42 157 Gross Profit Finance costs Depreciation Sundry expenses Operating profit Taxation Profit after taxation Dividends: Ordinary shares Preference shares Retained profit 52 2 9 14 25 27 10 17 6 2 8 9 $000 209
20X6 $000 $000 196 29 159 188 37 151 45 2 9 11 22 23 10 13 5 2 7 6
Required: a) Calculate the liquidity ratios in 20X6 and 20X7 b) Calculate the length of the cash operating cycle in 20X6 and 20X7 c) State whether the working capital is being managed effectively. 07. The following data relate to Mugwump Co, a manufacturing company. Sales revenue for year: Costs as percentage of sales Direct materials Direct labour Variable overheads Fixed overheads Selling and distribution $1,500,000 30% 25% 10% 15% 5%
Average statistics relating to working capital are as follows:
Receivables take 2 months to pay Raw materials are in inventory for three months WIP represents two months half-produced goods Finished goods represent one months production Credit is taken Materials Direct labour Variable overheads Fixed overheads Selling and distribution 2 months 1 week 1 month 1 month month
WIP and finished goods are valued at the cost of material, labour and variable expenses. Calculate the working capital requirement of Mugwump Co assuming that the labour force is paid for 50 working weeks in each year. 08. Brash is a medium- sized company producing a range of engineering products. Recently its sales have risen rapidly. It is now early in Year 3, and a summary of the companys performance and financial position in Years 1 and 2 are set out below:
Summary income statements for the year ended 31 December. Year 1 $000 12,000 7,000 5,000 200 4,800 1,000 3,800 Year 2 $000 16,000 9,150 6,850 250 6,600 1,600 5,000
Sales Cost of sales Operating profit Interest Profit before taxation Taxation Profit after taxation
Year1 $000 Non- Current assets Current assets Inventory Receivables Cash Total assets Ordinary shares (50 each) Accumulated profit Non-current liabilities (10% loan) Current liabilities Trade payables Other payables Bank over draft 9,000
Year 2 $000 12,000
1400 1600 1500
4,500 13,500 3,000 6,500 9,500 2,000
2,200 2,600 100
4,900 16,900 3,000 9,500 12,500 2,000
1,500 500 0
2000 13,500
2,000 200 200
2,400 16,900
Required: Explain why Brash might be overtrading, by identifying how the company is showing four symptoms of overtrading.
9. Hottubes Co is a small company specializing in the supply of high quality amplifier do-it- yourself kits for sale to Hi- Fi enthusiasts. These include superior electronic components, circuit boards and detailed instructions. Promotion is carried out through adverts in electronics and Hi- Fi magazines. The company buys most of its components from a specialist supplier in Hong Kong and the remainder from a few local suppliers. The CEO (and founder) is very proud of the companys performance and recently made the following comment. We have excellent products as seen in the recent rave reviews in a major consumer electronics magazine. Our business has grown rapidly over recent years and we have good profitability. We also have good liquidity with current assets easily covering current liabilities. This is partly due to improved credit control over receivables. However, our Hong Kong supplier demands payment at the end of each month for all items shipped in that month As with many other small businesses, Hottubes uses its bank overdraft to finance working capital and has no other longer term funding. The current overdraft rate is 1.0% per month on the monthly outstanding balance.
Extracts from the management accounts for the last two years are as follows. 31 December 20X2 $000 1,024 640 132 300 220 320 135 31 63 776 180 20X1 $000 640 400 81 208 96 204 104 30 40 490 100
Sales Cost of sales Other expenses Inventories Components Finished kits Trade receivables Trade payables Other payables Corporation tax due Purchases for the year Bank overdraft
Required: Prepare briefing notes for a meeting with the CEO calculating the companys working capital position and identify areas for improvement. Include in your answer a calculation of the cash operating cycle and any other calculations you feel are appropriate.

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01.

Required Calculate the cash operating cycle.

20X6 $000 $000 196 29 159 188 37 151 45 2 9 11 22 23 10 13 5 2 7 6

Average statistics relating to working capital are as follows:

Year 2 $000 12,000

1400 1600 1500

4,500 13,500 3,000 6,500 9,500 2,000

2,200 2,600 100

4,900 16,900 3,000 9,500 12,500 2,000

2,000 200 200

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