In: Finance
B) WCR,
c) Current ratio,
d) Quick ratio
e) Cash Conversion Efficiency (CCE)
d) Days cash held (DCH)
Solution:
Formula:
Net Working Capital = Current Assets – Current Liabilities
= $900,000 - $700,000
= $200,000 (Answer Part A)
Formula:
WCR (Working Capital Ratio) = Current Assets / Current Liabilities
= $900,000 / $700,000
= 1.2857 or 1.29 times (Answer Part B)
Formula:
Current Ratio = Current Assets / Current Liabilities
= $900,000 / $700,000
= 1.2857 or 1.29 times (Answer Part C)
Formula:
Quick Ratio = (Current Assets – Prepaid Expenses – Inventory) / Current Liability
= ($900,000 – $350,000) / $700,000
= $550,000 / $700,000
= 0.7857 or 0.79 times (Answer Part D)
Alternative formula:
Quick Ratio = (Cash and cash equivalents + Marketable securities + Accounts receivable) / Current Liability
= ($150,000 + $250,000) / $700,000
= 0.5714 or 0.57 times (Alternative answer Part D)
Formula:
Cash Conversion Efficiency or Cash Conversion Cycle = DSO + DIO – DPO
Where,
DSO (Days sales outstanding) = Average Accounts Receivable x 365 / Credit Sales
= $250,000 x 365 / $1,800,000
= 50.69 days
DIO (Days inventory outstanding) = Average Inventories x 365 / Cost of Goods Sold
= $350,000 x 365 / ($1,800,000 x 40%)
= $350,000 x 365 / $720,000
= 177.43 days
DPO (Days payable outstanding) = Average Accounts Payable x 365 / Cost of Goods Sold
= $300,000 x 365 / $720,000
= 152.08 days
Hence, Cash Conversion Cycle = 50.69 + 177.43 – 152.08
= 76.04 days (Answer Part E)
Here, operating expense is not given and only operating cash flow is given which is also positive. Hence, it is assumed that COGS of sales made is operating expense of business less cooperating cash made i.e. $720,000 - $130,000 = $590,000. It is to be noted that information is not complete.
Formula:
Days cash held = (Cash in hand / (Operating Expenses – Non cash expenses)) x 365
= ($150,000 / $590,000) x 365
= 92.79 days (Answer Part F)