In: Accounting

# Question 8: The following company has sales of $30 million and a cost of goods sold... Question 8: The following company has sales of$30 million and a cost of goods sold of $18 million. The balance sheet for period ending 31 December 2019 for this company appears below:  Assets$000 Liabilities and Shareholder Equity      $000 Cash 2500 Accounts Payable 1600 Accounts Receivable 4400 Other Payables 900 Inventory 1500 Accruals 1100 Total Current Assets 8400 Total Current Liabilities 3600 Property Plant and Equipment 10500 Long Term Debt 2500 Total Assets 18900 Total Liabilities 6100 Issued Equity 12800 Total Liability & Shareholder Equity 18900 a. Calculate the company’s net working capital in 2019. b. Calculate the company’s cash cycle for 2019. c. The industry average for accounts receivable is 28 days. What would this company’s cash cycle have been in 2019 if it had matched this industry average for accounts receivable? Comment on this new cash cycle outcome against b. above. ## Solutions ##### Expert Solution a) Net working Capital Net WC = CURRENT ASSETS - CURRENT LIABILITIES OR = INVENTORY + RECIEVABLES - A/C PAYABLES Both methods gives Net Working Capital, Second method represents only the “core” accounts that make up working capital in the day-to-day operations of the business. First Method ; Net WC = 8400 - 3600 = 4800 Second Method ; Net WC = 1500 + 4400 - 1600 = 4300 b) Cash Operating Cycle = Inventory Days + Recievable Days - Payable Days Inventory Days = Inventory ÷ Cost of Sales × 365 = 1500 ÷ 18000 × 365 = 30.4 days Receivable Days = Receivables ÷ Credit Sales × 365 = 4400 ÷ 30000 × 365 = 53.5 days Payable Days = Payables ÷ Cost of Sales × 365 = 1600 ÷ 18000 × 365 = 32.4 days Therefore, Cash Operating Cycle = 30.4 days + 53.5 days - 32. 4 days = 51.5 -> 52 days c) If Receivable days have been 28 days (Industry Average),then ​​Cash operating cycle = 30.4 + 28 - 32.4 = 26 Days. Old Cash Operating Cycle is Twice as that of New Cash Operating Cycle, this indicates that the company is taking more time to convert thier assets into cash. They almost have 54 days of Recievable days compared to industry Average of 28 days, so they have some liquidity issues with the recievables. Hope the answer is clear and if you need any further information please let me know in the comment below. Thank you! ## Related Solutions ##### Dickson City Company has annual sales of$5 million, while the cost of goods sold is...
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##### Cost of Goods Sold, Cost of Goods Manufactured Glenville Company has the following information for April:...
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