In: Accounting
Exercise 1) - Procurement impact on economic performance
Consider the following data:
Income statement:
Purchases: 1,000 €
EBIT: 280 €
No other costs
Balance Sheet:
Total Assets: 2,000 €
Inventory: 700 €
Question: How much ROA changes by reducing 5% cost of purchases?
Exercise 2) - Procurement impact on financial performance
Consider the following situation:
A supermarket buys shampoo from a supplier and keeps it on the shelf about one week before the customer buys it
Customers pay cash or via credit card, so the average payment time from customers is two weeks
The supermarket pays suppliers eight weeks after the purchase
Question: What is the value of the C2C (or Cash-to-Cash or Cash-Generation-Cycle)?
Exercise 1. | |||||||
ROA = Net income/ Total Assets | |||||||
= 280/2000 | |||||||
= 0.14 | |||||||
= 14% | |||||||
If cost of purchase reduce by 5% | |||||||
Cost of purchases = 1000-(1000x5%) | |||||||
= 950 | |||||||
Increase in EBIT = 280+50 | |||||||
= 330 | |||||||
Inventory = 700-35 | |||||||
= 665 | |||||||
Total Assets = 2000-700+665 | |||||||
= 1965 | |||||||
ROA = 330/1965 | |||||||
= 0.1679 | |||||||
= 16.79% | |||||||
ROA will increase by 2.79% by reducing 5% cost of purchases. | |||||||
Exercise 2. | |||||||
C2C = Days inventory on hand + Days sales outstanding - Days payable outstanding | |||||||
= one week + two weeks - eight weeks | |||||||
= -five weeks | |||||||
this means a company can easily pay off its outstanding 5 weeks after receiving it. | |||||||
A negative C2C is a good thing. |