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# Working Capital Management and Operating cycle

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Q1
Two companies, A and B, have the following balance sheet accounts:
A B
Current assets \$ 150 \$ 800
Fixed assets 300 2200
Current liabilities 75 600
Long-term debt 75 1000
Equity 300 1400
a. Compute values for all of the ratios that measure
working capital for firms A and B.
b. Compare Firm A to B with regards to its need for
working capital and how it finances its working capital
(short-term vs. long-term financing).

2. The Latigo Company has the following financial information:
Sales \$200
Cost of goods sold 100
Depreciation 40
Interest expense 2
Tax 7
Net profit \$ 7
Cash \$ 5
Accounts receivable 20
Inventory 25
Fixed assets 50
Accounts payable 5
Note payable 15
Long-term debt 20
Equity 70
a. The current assets to sales ratio for the industry is 0.20. State whether Latigo make more or less use of working capital than the industry.
b. Compute the working capital turnover for Latigo and for the industry.
c. Compute the operating cycle and the cash conversion cycle for Latigo.
d. The industry average cash conversion cycle is 112 days. Compare the industry to Latigo and identify any inferences that you can make.

A.
CURRENT ASSETS TO SALES RATIO
CURRENT ASSETS 50
SALES 200
RATIO 0.25
It is utilizing working capital less efficiently as it has got higher ratio then the industry.
The lower the current-assets to-sales ratio, the less a firm needs to invest in working capital
to generate a dollar of sales, which usually means that the firm is utilizing its working capital in a more resourceful manner.

b. Compute the working capital turnover for Latigo and for the industry.

I need help with questions 1 and 2 in the problem section at the back of the attached chapter. I need all solutions in Microsoft excel along with the written answers to the questions.

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(See attached file for full problem description)

#### Solution Preview

Two companies, A and B, have the following balance sheet
accounts:
A B
Current assets \$ 150 \$ 800
Fixed assets 300 2200
Current liabilities 75 600
Long-term debt 75 1000
Equity 300 1400
a. Compute values for all of the ratios that measure
working capital for firms A and B.
b. Compare Firm A to B with regards to its need for
working capital and how it finances its working capital
(short-term vs. long-term financing).

working capital = total current assets

A B
WORKING CAPITAL 150 800

NET WORKING CAPITAL
current assets - current liabilities 75 200

CURRENT RATIO
CURRENT ASSETS/CURRENT LIABILITIES 2.00 1.33

CURRENT ASSET TO TOTAL ASSETS RATIO
CURRENT ASSET/TOTAL ASSETS 0.33 0.27
TOTAL ASSETS 450.00 3000.00

AS SALES FIGURE IS NOT GIVEN WE CANNOT CALCUALTE RATIOS SUCH
AS CURRENT ASSETS TO SALES AND WORKING CAPITAL TURNOVER

FIRM A IS MORE LIQUID AS IT HAS HIGHER RATIOS (CURRENT RATIO AND CA ...

#### Solution Summary

This gives an explanation of various concepts of working capital management like assessment of liquidity position of firm, operating and cash conversion cycle. This includes step be step calculation.

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