TOPIC: WORKING CAPITAL MANAGEMENT - starrygoldservices

1 STARRY GOLD ACADEMY +2348023428420, +2347038174484, , Page 1 STRATEGIC FINANCIAL MANAGEMENT WEEK 8 SOLUTIONS TOPIC: WORKING CAPITAL MANAGEMENT Kindly go through chapter 3 part 1- 4 in the video lecture before you attempt the questions because the topic have been simplified and analyzed for easy understanding. AREAS COVERED Computation of WORKING CAPITAL cycle Inventory planning and MANAGEMENT Cash planning, control and MANAGEMENT Receivables and Payables MANAGEMENT REVIEW QUESTION QUESTION 1 Extracts from the statement of financial position (balance sheet) and income statement of a company are set out below. Inventories: Raw materials 864,000 Work in progress 448,128 Finished goods 1,567,893 Trade receivables 1,425,600 Trade payables 604,800 STARRY GOLD ACADEMY +2348023428420, +2347038174484, , Page 2 Annual purchases 1,745,000 Annual cost of sales 5,272,128 Annual sales 5,802,400 Required Calculate the length of the cash operating cycle for the company.

2 QUESTION2 Blessed Nigeria Ltd makes annual credit sales of N4,800,000. Credit period was 30 days but due to poor credit administration, the average collection period has been 45 days with 1% sales resulting in bad debts which is normally written off. A factor is being considered to take up the administration of the debts and trade credits at an annual fee of of credit sales. In this respect, the company would save administrative costs of N96,000 annually and the payment period is expected to be 30 days. The factor would provide 80% of invoiced debts in advance at an interest rate of 12% per annum (base rate). The company can obtain overdraft facility to finance its debtors at a rate of over base rate. Required: (a) Advise the company s MANAGEMENT on whether or not to accept the services of a factor. (b) Factoring is one of the popular ways of managing accounts receivable in corporate organizations.

3 When should factoring be used for debt collection? QUESTION 3 The WORKING CAPITAL cycle of a business is the length of time between payment for inventory entering into inventory and receipt of the proceeds of sales. The table below gives information extracted from the Statement of Comprehensive Income and the Statement of Financial Position of Bright Sum Plc. for the years 2012 to 2014. 2012 2013 2014 Inventory: N 000 N 000 N 000 STARRY GOLD ACADEMY +2348023428420, +2347038174484, , Page 3 Raw materials 1,080 1,458 1,800 Work-in-progress 756 972 933 Finished goods 864 1,296 1,428 Purchases 5,184 7,020 7,200 Cost of goods sold 7,560 9,720 10,983 Revenue 8,640 10,800 11,880 Trade receivables 1,728 2,592 2,970 Trade payables 864 1,053 1,260 You are required to: a. Calculate the WORKING CAPITAL cycle for each of the 3 years.

4 B. Explain THREE possible actions that might be taken to reduce the length of the cycle and TWO possible disadvantages of each. QUESTION 4 ABC Plc uses 120,000 units of Material X each year, which costs 300 for each unit. The cost of placing an order is 6,500 for each order. The annual cost of holding inventory each year is 10% of the purchase cost. The EOQ based on the above information is 7,211 units. The supplier offers a price discount of 5 per unit for orders of 10,000 or more. Required: Calculate the order quantity that will minimise total costs. STARRY GOLD ACADEMY +2348023428420, +2347038174484, , Page 4 QUESTION 5 (a) Discuss: (i) The significance of trade payables in a firm's WORKING CAPITAL cycle; and (ii) The dangers of over-reliance on trade credit as a source of finance. QUESTION 6 SALIMOT LTD is considering a proposal to change its credit policy from allowing its receivables a credit period of 50 days, to either 40 days or 60 days, and supplied you with the following data.

5 Period of credit allowed to receivables Annual turnover (all on credit) Days N'000 50 (current) 420 40 350 (estimated) 60 520 (estimated) The average profit/volume ratio for the company is 22% and the cost of financing receivables is 12%. Required Compute and explain briefly what the effect on profit of each proposal by SALIMOT LTD would be, if adopted.