SMG FE 323 Chapter Ch. 19: FE323TextbookNotesCh19

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ivorycrab864

9 Feb 2017

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The cash cycle: the level of working capital reflects the length of time between when cash goes out a firm at the beginning of the production process and when it comes back in. Operating cycle is the average length o time between when the firm originally purchases its inventory and when it receives the cash back from selling its product. Cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory, Cash conversion cycle (ccc) defined as ccc = inventory. Days + accounts receivable days accounts payable days. Accounts receivable days = accounts receivable / avg. Accounts payable days = accounts payable / avg. Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders.

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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)

rosetiger825

a. What is the difference between aâ firm's cash cycle and its operatingâ cycle? Select all that apply

A firm's cash cycle is the average length of time from when a firm pays cash for its inventory to when it receives cash from the sale of that inventory? (or the end product that the firm produced with the? inventory).

B. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is longer than the operating cycle of the firm.

C. firm's operating cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay for the inventory they purchase.

D. A firm's operating cycle is the average length of time between when a firm purchases its inventory and when the firm receives cash from the sale of the inventory. E. The cash cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay cash for the inventory they purchase minus the average number of days the firm takes to pay its suppliers for the inventory. F. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is shorter than the operating cycle of the firm.

amethystwater-buffalo366

Provide two examples of a carrying cost.

Provide two examples of a shortage cost.

Dandee Lions, Inc. has a cash balance of $125,000, accounts payable of $250,000, inventory of $205,000, accounts receivable of $350,000, notes payable of $70,000, and accrued wages and taxes of $85,000. How much net working capital does the firm need to fund?

Sow Tire, Inc. has sales of $1,550,000 and cost of goods sold of $1,000,000. The firm had a beginning inventory of $97,000 and an ending inventory of $82,000. What is the length of the daysâ sales in inventory?

If a firm has a cash cycle of 55 days and an operating cycle of 80 days, what is its average payment period?

CM Enterprises estimates that it takes, on average, four days for customersâ payments to arrive, two days for the payments to be processed and deposited by the bookkeeping department, and three more days for the checks to clear once they are deposited. What is CMâs collection float?

Suppose that Dunn Industries has annual sales of $3.75 million, cost of goods sold of $1,800,000, average inventories of $1,250,000 and average accounts receivable of $760,000. Assuming that all of Dunnâs sales are on credit, what will be the firmâs operating cycle? (4 points)

Suppose that Ken-Z Art Gallery has annual sales of $920,000, cost of goods sold of $560,000, average inventories of $250,000, average account accounts receivable of $35,000, and an average accounts payable balance of $69,500. Assuming that all of Ken-Zâs sales are on credit, what will be the firmâs cash cycle?

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SMG FE 323 Chapter Ch. 19: FE323TextbookNotesCh19

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