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Business-Finance Tutorial 8 Answer

Business-Finance Tutorial 8 Answer

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Published by: Chia Kong Haw on Dec 23, 2010
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ABMF4024 Business Finance Tutorial 8 Answer 23 December 2010
Question 1
The cash conversion cycle is the length of time funds are tied up in working capital, or the length of timebetween paying for working capital and collecting cash from the sale of the working capital. Holding otherthings constant, if you reduce the CCC you are reducing the amount of funds tied up. These funds have acost; therefore, a reduction in funds will lower the firms costs and thus raise its profitability. Here we havemade an assumption that you can reduce working capital without harming sales.
Question 2
When most of us use the
term cash,
we mean currency (paper money and coins) plus bank demand deposits.However, when corporate treasurers use the term, they often mean currency and demand deposits plusvery safe, highly liquid marketable securities that can be sold quickly at a predictable price and thus beconverted to bank deposits. Therefore, cash as reported on the balance sheets generally includes short-term securities, which are also called 
cash equivalents
.
Question 3
Tools1)
 
U
se a lockbox2)
 
Insist on wire transfer from customers3)
 
Synchronize inflows and outflows4)
 
U
se a remote disbursement account5)
 
Reduce need for safety stock of cashi.
 
Increase forecast accuracyii.
 
Hold marketable securitiesiii.
 
Negotiable a line of creditProcedures1)
 
Forecast cash inflows, outflow, and ending cashbalances2)
 
U
sed to plan loans needed or funds available toinvest3)
 
Can be daily, weekly or monthly forecast-
 
Monthly for actual planning and daily for actualcash management
Question 4
G
oals of inventory management1)
 
Reduce inventory cost2)
 
Make sure u have enough inventory for your company and customer needsInventory Control System1)
 
Just-In-Time System2)
 
Computerized Inventory System3)
 
ABC System4)
 
Outsourcing
 
ABMF4024 Business Finance Tutorial 8 Answer 23 December 2010
Question 5
 
 

 

 
   
 
 
 
Question 6
Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P = $1,000,000; CO
G
S = 0.8(Sales); Intereston bank loan = 8%; CCC = ?CCC = Inventory conversion period + Average collection period  Payables deferral period.Inventory conversion period =
daypersoldgoodsof Cost  Inventory
 =
365 /)]000,000,15)($8.0[( 000,000,2$
 =
7123.876,32$ 000,000,2$
 = 60.83 days.Average collection period =
Sales/365sReceivable
 =
365 /000,000,15$ 000,000,3$
 = 73 days.Payables deferral period =
sold/365goodsof Cost  Payables
 =
7123.876,32$ 000,000,1$
 = 30.42 days.CCC = 60.83 + 73  30.42 =
103.41
days
.
 2. Lower inventories and receivables by 10% each and increase payables by 10%. Sales and CO
G
Sremain the same.Inventory = $2,000,000
v
0.9 = $1,800,000.A/R = $3,000,000
v
0.9 = $2,700,000.A/P = $1,000,000
v
1.1 = $1,100,000.Calculate new CCC:Inventory conversion period =
7
123.8
7
6,32$ 000,800,1$
 = 54.75 days.
 
ABMF4024 Business Finance Tutorial 8 Answer 23 December 2010Average collection period =
365 /000,000,15$ 000,
7
00,2$
 = 65.70 days.Payables deferral period =
7
123.
 
7
6,32$ 000,100,1$
 = 33.46 days.New CCC = 54.75 + 65.70  33.46 = 86.99 days
§
87
days
.
 
Question 7
Annual sales  RM50, 735,000Inventory level  RM15, 012,000Account receivable balance outstanding  RM10, 008,000Payable deferral period  30days
    
 
 
 
 
 
   
 
 
 Annual sales  RM50,735,000Inventory level  RM13,066,000Account receivable balance outstanding  RM8,062,000Payable deferral period  40days
  
 

 
  
 
 
 New CCC  Old CCC = 112  150 = -38days*Better because lower CCC, very fast to pay suppliersAfter lowered inventory and a/creceivable by RM1,946,000

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