Question

1. Basic concepts

During the wake of the financial crisis, Ben Bernanke, chairman of the Federal Reserve, said that “shortening the cash cycle and better use of working capital” are the most important factors as private-sector businesses struggle to overcome the current economic volatility and difficulty in accessing capital markets (IBM Global Business Services, “Managing Working Capital in the New Economic Environment, http://www-935.ibm.com/services/uk/bcs/pdf/working_capital_paper.pdf).

Given the importance of working capital management, consider the case of Purple Dandelion Flower Inc. and both the amount of working capital that it is using being used in the firm and explore the prospects of how its working capital will be financed.

Purple Dandelion Flower Inc. reported the following results for current assets and liabilities on its most recent balance sheets. Interestingly, the company’s sales did not change—it reported sales of $27,750 for its most recent year as well as for last year.

The columns labeled “Ending ($)” show results at the end of the most recent year, and the columns labeled “Beginning ($)” show results at the end of the previous year:

	Beginning	Ending
Current assets
Cash	$6,500	$12,500
Accounts receivable	12,500	10,000
Inventory	9,750	8,500
Current liabilities
Accounts payable	$12,000	$12,250
Notes payable	8,000	9,000
Accruals	0	0

Using the information given and a 365-day year, calculate days of working capital, net working capital, and net operating working capital for Purple Dandelion Flower. Use your calculations to complete the following statements, and round your numerical responses to two decimal places.

•	Purple Dandelion’s days of working capital improved from   days in the previous year to   days at the end of the most recent year.
•	The company’s net working capital increased from $8,750.00 in the previous year to   at the end of last year.
•	Purple Dandelion’s net operating working capital increased from   in the previous year to $18,750.00 at the end of last year.

Consider the following statement:

Assuming that other things remain constant, if Purple Dandelion has very, very low working capital face, it implies that the company has no business risk.

Based on your understanding of Purple Dandelion Flower’s working capital, operating assets, and nonoperating assets, is this statement true or false?

This statement is false.

This statement is true.

Answer 1

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