Week 7 Problem Set
Week 7 Problem Set
Chapter 26 (page 903):
1. Answer the following questions:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal? 4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
THE GREEK CONNECTIONBalance SheetAs of December 31, 2012 (in $ thousand) |
Assets | Liabilities and Equity |
CashAccounts receivableInventory | $ 2,000 3,950 1,300 | Accounts payableNotes payableAccruals | $ 1,500 1,000 1,220 |
Total current assets | $ 7,250 | Total current liabilitiesLong-term debt | $ 3,720 3,000 |
Net plant, property,and equipment | $ 8,500 | Total liabilitiesCommon equity | $ 6,720 9,030 |
Total assets | $ 15,750 | Total liabilities and equity | $ 15,750 |
a. Calculate The Greek Connection’s net working capital in 2012.
Net working capital = current assets - its current liabilities
= $7,250 - $3,720 = $3,530
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
The cash conversion cycle (CCC) is defined as
CCC = Accounts Receivable Days + Inventory Days − Accounts Payable Days
Accounts Receivable Days = 3,950,000/(32,000,000/365) = 45.054687
Inventory Days = 1,300,000/(20,000,000/365) = 23.725
Accounts Payable Days = 1,500,000/(20,000,000/365) = 27.375
CCC = 45.054687 + 23.725 – 27.375 = 41.404687 days
c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?
CCC = Accounts Receivable Days + Inventory Days − Accounts Payable Days
= 30 + 23.725- 27.375 = 26.35 days
5. Assume the credit terms offered to your firm by your suppliers
Chapter 26 (page 903):
1. Answer the following questions:
a. What is the difference between a firm’s cash cycle and its operating cycle?
b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?
c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal? 4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
THE GREEK CONNECTIONBalance SheetAs of December 31, 2012 (in $ thousand) |
Assets | Liabilities and Equity |
CashAccounts receivableInventory | $ 2,000 3,950 1,300 | Accounts payableNotes payableAccruals | $ 1,500 1,000 1,220 |
Total current assets | $ 7,250 | Total current liabilitiesLong-term debt | $ 3,720 3,000 |
Net plant, property,and equipment | $ 8,500 | Total liabilitiesCommon equity | $ 6,720 9,030 |
Total assets | $ 15,750 | Total liabilities and equity | $ 15,750 |
a. Calculate The Greek Connection’s net working capital in 2012.
Net working capital = current assets - its current liabilities
= $7,250 - $3,720 = $3,530
b. Calculate the cash conversion cycle of The Greek Connection in 2012.
The cash conversion cycle (CCC) is defined as
CCC = Accounts Receivable Days + Inventory Days − Accounts Payable Days
Accounts Receivable Days = 3,950,000/(32,000,000/365) = 45.054687
Inventory Days = 1,300,000/(20,000,000/365) = 23.725
Accounts Payable Days = 1,500,000/(20,000,000/365) = 27.375
CCC = 45.054687 + 23.725 – 27.375 = 41.404687 days
c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days?
CCC = Accounts Receivable Days + Inventory Days − Accounts Payable Days
= 30 + 23.725- 27.375 = 26.35 days
5. Assume the credit terms offered to your firm by your suppliers