2.0 Working Capital Management is key to maximising the profitability of a business. Identify a common benchmark for Working Capital, and explain the implications of moving away from this benchmark.

The following are the financial information of David Bookshop as at December 2015:

Davidâs Book Shop:

Current Assets

(at 31 Dec 2015)

Current Assets Current Liabilities

Cash at bank 2,500 Accounts payable 35,500

Accounts receivable 16,500 Other current liabilities 1,800

Inventory 34,000 Total Current Liabilities 37,300

Supplies on hand 600

Total Current Assets 53,600

Income Statement (extract)

(for the year to 31 Dec 2015)

Sales revenue 225,500

Less: Cost of Sales (136,800)

Gross Profit 88,700

2.1 Calculate the Inventory Turnover (times), and the Days Sales in Inventory.

2.2 Half of Davidâs sales are for cash, and half on credit terms. Calculate the Debtors Turnover (times), and the Days Sales Outstanding.

2.3 All of Davidâs purchases are on credit terms. If we assume that the value of Davidâs opening inventory is the same as his closing inventory we can conclude that Cost of Sales represents purchases for the year.

Calculate the Accounts Payable Turnover (times), and the Days Payables Outstanding.

2.4 Calculate Davidâs:

â¢ Operating Cycle; and

â¢ Cash Conversion Cycle.

Question

2.0 Working Capital Management is key to maximising the profitability of a business. Identify a common benchmark for Working Capital, and explain the implications of moving away from this benchmark.

The following are the financial information of David Bookshop as at December 2015:

Davidâs Book Shop:

Current Assets

(at 31 Dec 2015)

Current Assets Current Liabilities

Cash at bank 2,500 Accounts payable 35,500

Accounts receivable 16,500 Other current liabilities 1,800

Inventory 34,000 Total Current Liabilities 37,300

Supplies on hand 600

Total Current Assets 53,600

Income Statement (extract)

(for the year to 31 Dec 2015)

Sales revenue 225,500

Less: Cost of Sales (136,800)

Gross Profit 88,700

2.1 Calculate the Inventory Turnover (times), and the Days Sales in Inventory.

2.2 Half of Davidâs sales are for cash, and half on credit terms. Calculate the Debtors Turnover (times), and the Days Sales Outstanding.

2.3 All of Davidâs purchases are on credit terms. If we assume that the value of Davidâs opening inventory is the same as his closing inventory we can conclude that Cost of Sales represents purchases for the year.

Calculate the Accounts Payable Turnover (times), and the Days Payables Outstanding.

2.4 Calculate Davidâs:

â¢ Operating Cycle; and

â¢ Cash Conversion Cycle.

The Greek Connection had sales of $32 million in 2009, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:

	THE GREEK CONNECTION
	Balance Sheet
	As of December 31, 2009
	(000)

	Assets		Liabilities and Equity
	Cash	$2,000	Accounts payable	$1,500
	Accounts receivable	3,950	Notes payable	1,000
	Inventory	1,300	Accruals	1,220
	Total current assets	$7,250	Total current liabilities	$3,720

	Net plant, property		Long-term debt	$3,000
	and equipment	$8,500	Total liabilities	$6,720
	Total Assets	$15,750	Common equity	9,030
			Total liabilities and equity	$15,750

a.	Calculate The Greek Connectionâs net working capital in 2009.
b.	Calculate the cash conversion cycle of The Greek Connection in 2009.
c.	The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?

	Sales (000)	$32,000	Days in a year	365
	Cost of Goods Sold (000)	$20,000

a.	Calculate The Greek Connectionâs net working capital in 2009.

	Net working capital (000)

b.	Calculate the cash conversion cycle of The Greek Connection in 2009.

	Accounts receivable days
	Inventory days
	Accounts payable days
	Cash conversion cycle (days)

c.	The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?

	Industry accounts receivable days	30

	Cash conversion cycle (days)

JONES CORPORATION
Current Assets					Liabilities
Cash			$	22,000	Accounts payable	$	127,000
Accounts receivable				81,100	Bonds payable (long term)		85,600
Inventory				50,000
Long-Term Assets					Stockholders' Equity
Gross fixed assets	$	526,000			Common stock	$	150,000
Less: Accumulated depreciation		150,700			Paid-in capital		70,000
Net fixed assets*				375,300	Retained earnings		95,800
Total assets			$	528,400	Total liabilities and equity	$	528,400


Sales (on credit)	$	1,326,000
Cost of goods sold		790,000
Gross profit	$	536,000
Selling and administrative expense^â		304,000
Depreciation expense		59,800
Operating profit	$	172,200
Interest expense		14,500
Earnings before taxes	$	157,700
Tax expense		99,600
Net income	$	58,100

SMITH CORPORATION
Current Assets					Liabilities
Cash			$	38,400	Accounts payable	$	83,300
Marketable securities				12,700	Bonds payable (long term)		217,000
Accounts receivable				74,300
Inventory				83,700
Long-Term Assets					Stockholders' Equity
Gross fixed assets	$	504,000			Common stock	$	75,000
Less: Accumulated depreciation		255,800			Paid-in capital		30,000
Net fixed assets*				248,200	Retained earnings		52,000
Total assets			$	457,300	Total liabilities and equity	$	457,300

SMITH CORPORATION
Sales (on credit)	$	1,100,000
Cost of goods sold		640,000
Gross profit	$	460,000
Selling and administrative expense^â		272,000
Depreciation expense		56,500
Operating profit	$	131,500
Interest expense		24,300
Earnings before taxes	$	107,200
Tax expense		56,500
Net income	$	50,700

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