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Problem:
The following financial information relates to XYZ Co.
Income statement extracts
2011
2010
RM000
Revenue
14,525
10,375
Cost of sales
10,458
6,640
Profit before interest and tax
4,067
3,735
Interest
355
292
Profit before tax
3,712
3,443
Taxation
1,485
1,278
Distributable profit
2,227
2,165
Statement of financial position extracts
Non-current assets
15,284
14,602
Current assets
Inventory
2,149
1,092
Trade receivables
3,200
1,734
5,349
2,826
Total assets
17,428
20,633
Current liabilities
Trade payables
2,865
1,637
Overdraft
1,500
250
4,365
1,887
Equity
Ordinary shares
8,000
Reserves
4,268
3,541
12,268
11,541
Long-term liabilities
7% Bonds
4,000
Total liabilities
Average ratios for the last two years for companies with similar business operations to XYZ Co are as follows:
Current ratio 1·7 times
Quick ratio 1·1 times
Inventory days 55 days
Trade receivables days 60 days
Trade payables days 85 days
Sales revenue/net working capital 10 times
Required:
(a) Critically discuss the similarities and differences between working capital policies in the following areas:
(i) Working capital investment;
(ii) Working capital financing.
Summary of problem:
This question belongs basically to Finance as well as it is about discussing the differences between working capital policies with respect to working capital investment as well as working capital financing. These questions have been answered in the solution comprehensively.
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