Question

CASE 3 (25 points)

Income statements and balance sheets for Melia Corporation follow.

Income Statements for Years 2015 and 2016

2015 2016

Net sales	$438,000	$575,000
- Cost of goods sold	-285,000	-380,000
Gross profit	153,000	195,000
-Administrative expenses	-45,000	-65,000
-Marketing expenses	-32,000	-39,000
-Research and development	-20,000	-27,000
-Depreciation	-14,000	-17,000
EBIT	42,000	47,000
-Interest expense	-12,000	-20,000
income before taxes	30,000	27,000
-Income before taxes	-9,000	-8,000
Net income	$21,000	$19,000

Balance Sheets for Years Ended 2014, 2015, and 2016

Assets 2014   2015 2016

Cash and marketable securities	$10,000	$10,000	$5,000
Receivable	60,000	75,000	105,000
Inventories	70,000	95,000	140,000
Total current assets	140,000	180,000	250,000
Gross plant and equipment	205,000	205,000	255,000
Less: accumulated depreciation	-28,000	-42,000	-59,000
Net plant and equipment	177,000	163,000	196,000
Total assets	$317,000	$343,000	$446,000
Liabilities and Equity
Payable	47,000	57,000	84,000
Short -term bank loan	40,000	44,000	110,000
Accrued liabilities	95,000	110,000	204,000
Long-term debt	100,000	90,000	80,000
Owners equity	122,000	143,000	162,000
Total liabilities and equity	$317,000	$343,000	$446,000

Instructions:

1. Using the above information, calculate for 2015 and 2016 the following: a. Receivables turnover, Inventory turnover, and Payables turnover.
b. Receivables period, Inventory period, and Payables period.
c. Operating Cycle and Cash Conversion Cycle.

(5 points) (5 points) (5 points)

2. Discuss the changes that took place from 2015 to 2016 and suggest the ways how the company could improve its performance. (10 points)

Answer 1

1]		2015	2016
a]	Receivables turnover [Net-sales/Average AR]	6.49	6.39
		[438000/((60000+75000)/2)]	[575000/((75000+105000)/2)]
	Inventory turnover [COGS/Average inventory]	3.45	3.23
		[285000/((70000+95000)/2)]	[380000/((95000+140000)/2)]
	Payables turnover [COGS/Average payables]	5.48	5.39
		[285000/((47000+57000)/2)]	[(380000/((57000+84000)/2)]
b]	Receivables period [365/Receivables turnover]	56.25	57.13
	Inventory period [365/Inventory turnover]	105.66	112.86
	Payables period [365/Payables turnover]	66.60	67.72
c]	Operating cycle [Receivables period+Inventory period]	161.91	169.99
	Cash conversion cycle [Operating cycle-Payables period]	95.31	102.28
2]	The three turnover ratios have decreased marginally in 2016 when compared to 2015. It has the effect of
	increasing the operating cycle and cash conversion cycle by about 8 days.
	The increase in OC and CCC indicate reduction in efficiency in current asset management and would require
	higher investment in NWC.
	The payables period has remained almost the same, however.
	The firm should review its AR and inventory policies to increase their turnover and thereby decrease the
	amounts invested in them.
	To increase AR turnover, the firm may adopt a cash discount for early payment, have stricter credit appraisal
	and follow up measures, etc.
	To improve inventory turnover, the firm should fix inventory levels scientifically and move towards JIT. A
	review may also be made of slow moving/obsolete items in the inventory.