Question

Part A) Tom and Rob's Sporting Goods (T&R's) is a Tampa-based athletic store run by two Boston transplants. T&R has sales of $2.19 M, net income of $0.174 M, net fixed assets of $2.2 M, and current assets of $3.7 M. The firm has $1.1 M in accounts receivables. What is the common-size statement value of A/R for T&R? Enter all percentages as a decimal (ex. 25.7% as 0.257).

Part B) Walkling Enterprises (WE) has $1,312,500 in current assets. They also have $525,000 in current liabilities. Its initial inventory level is $375,000. WE is planning on issuing short-term notes payable and using the proceeds to buy more inventory. How much can WE's short-term debt (notes payable) increase without pushing its current ratio below 2.0?

Part C) Fat Cat Incorporated has $15,411 in total assets, depreciation of $2,051, and interest of $3,094. The total asset turnover rate is 1.8. Earnings before interest and taxes is equal to 35 percent of sales. What is the cash coverage ratio? Enter your response to two decimal places.

Part D) Jocelyn's Toy Shoppe has an inventory period of 48 days, an accounts payable period of 64 days. They have an accounts receivable turnover rate of 22. What is the length of the cash cycle? Round your answer to two decimal places.

 

Answer 1

Part A): Common Size Statement value of A/R (accounts receivable) for T&R:

Common size statement is in which each line item of financial statement shown in percentage taking base total income for Profit and Loss statement, Total asset or total liability in balance sheet

So in this case for finding the value of A/R (accounts receivable) for T&R in common szie statement we need to prepare Common size statment of balance sheet and for that we require total assets or total liability.

Total asset of T&R = Net fixed asset + Current assets

= $ 2.2 M + $ 3.7 M = $ 5.9 M

Common size statement

Particular's (Asset name)	Amt (Asset value)	in %
Net Fixed Asset	$ 2.2	0.373
Current assets
Accounts Receivable	$ 1.1	0.186
Others current assets	$ 2.6	0.44
Total Assets	$ 5.9	1

So here A/R value is 0.186.

Note: A/R is included in current assets.

Part B): Current assets = $ 1,312,500 , current liabilities = $ 525,000, Inventory = $ 375,000

Current ratio = Current asset / Current liability

$ 1,312,500 / $ 525,000 = 2.5

Now suppose by X amount WE has borrow for purchasing additional inventory, and this borrowing is for short term. So there is equivalent raise in current asset (inventory purchase) and in current liability (amount borrowed).

Now WE requirement is that current ratio should not go below 2

So amount should WE borrow is calculated below:

Requried current ratio after borrowing = current asset (present) + Additional inventory (X) / current liability (present) + borrowed amount (X)

2 = $ 1,312,500 + X / $ 525,000 + X

$ 1,312,500 + X = $ 1,050,000 + 2X

X = $ 262,500

So WE should borrow $ 262,500 so that current ratio should not go below 2.

Part C): Total asset = $ 15,411, depreciation $ 2,051, interest $ 3,094, Total asset turnover ratio = 1.8

Total asset turnover ratio = Total asset / Sales

1.8 = $ 15,411 / Sales

sales = $ 27,739.8

EBIT (earning before interest and tax) = 35% of sales

35% * $ 27,739.8 = $ 9708.93

To find Cash coverage ratio, we need add non cash expenses to EBIT then divide it by interest expense

So,

EBIT + Depreciation / Interest

($ 9708.93 + $ 2,051) / $3,094 = 3.8 times

This shows that company has able to pay interest in year 3.8 times.

Part D): Inventory period means how much time required to sold average inventory.

Account payable period means in how much time we pay to our suppliers

Account recievables period means in how much time we recieves our payment from customers

Now we have,

inventory period = 48 days, account payable period = 64 days, account recievables turnover rate = 22

Now in a year 365 days are there. So Account recievables = Days / accounts receivable turnover rate

365 / 22 = 16.59 days

To find cash length cycle we need to add inventory period + accounts receivable period - Account payable period

48 + 16.59 - 64 = 0.59

So the length of cash cycle is 0.59.

Explantion of part D: Inventory period means time occured in sales of goods and then after customers pay after some day (i.e accounts receivable).It is called oprating cash cycle.

Means After this time you will have cash. So for our case it is 48 + 16.59 = 64.59.

And accounts payable period means in how many days company pays to the suppliers. So that's means after that much time company gives the cash.

So for in our case it is 64 days. So company cash cycle is 64.59 - 64 = 0.59.

So conclusion it that if cash flow cycle is negative then it is good otherwise company required to pay first.