Working capital mini qs, Financial Management

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Q. Working capital mini Qs?

During January 20X4, Gazza Ltd made credit sales of £30,000 that have a 25% mark up. It also purchased £20,000 of inventories on credit.

Calculate by how much the working capital will decrease or increase as a result of above transactions?

Tuffy Ltd has an annual turnover of £18m on which it earns a marginof 20%. All sales and purchases are made on credit and it has a policy of sustaining the following levels of inventories, trade receivables and payables throughout the year.

Inventory                    £2 million

Trade receivable          £5 million

Trade payable              £2.5 million

Calculate Tuffy Ltd.'s cash cycle to the nearest day?

Solution:

Working capital mini Q's

Firstly note the difference between a marginand a mark-up

Mark-up= 100% + 25% = 125%   Profit = (25 / 125)   Cost = 100 / 125

Margin = 75% + 25% = 100%   Profit = (25 / 100) Cost = 75 / 100

1                                                                                  Effect on WC

Increase in trade receivables                                       £30,000

Increase in trade payables                                           (£20,000)

Inventories -increase due to purchases                       £20,000

Inventories -Decrease because of sales (i.e.COS)

{30,000 x 100 / 125}                                                  (£24,000)

Net effect on WC -increase                                        £ 6,000

2 Cash cycle = inventory days + trade receivable days -trade payable days

Inventory days = (Average inventory/Cost of sales) x365

Cost of sales = £18 million x 0.8 = £14.4 million

Inventory days                        = £2 / £14.4 x 365      = 51 days

Trade receivable days             = Trade receivable / sales x 365

= £5 / £18 x 365                      = 101 days

Trade payable days                 = Trade payable / COS x 365

= £2.5m / £14.4 x 365             = (63) days

Cash cycle                               = 89 days

89 days is the average time from the payment of a supplier to the receipt from a customer.


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