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Cash-to-cash cycle for McGhee Corporation

Use the information below to answer the following questions.

1. Convert the asset portion of the firms balance sheet into its daily equivalent. How many days does the firm have in its asset "cash -to-cash" cycle? How can the firm make the number of days less?

2. Convert the short tem liabilities on the balance sheet into their daily equivalents. How many days are in the firms liability "cash-to-cash" cycle? How can the firm make the number of days less?

3. Using your answers from 1 and 2 , determine the number of days that the firm may need to finance itself durring the cash-to-cash cycle. How can this number be used to determine the amount of external financing neccessary?

Exhibit 1

McGhee Corporation. Balance Sheet, December 31, 2003.
Cash $140,000
Accounts receivable $1,225,000
Inventory $875,000
Current assets $2,240,000

Net Fixed assets $2,135,000
Total Assets $4,375,000

Accounts payable $700.000
Accruals $140,000
Notes payable-bank $788,000
Current maturities of LT Debt $87,500
Current liabilities $1,715,000

Long-term debt $962,500

Commom stock &PIC $297,000
Retained earnings $1,400,000
Total liabilities & equity $4,375,000

Exhibit 2

Selected Income Statement Information, December 31,2003,

Sales Revenue, net $15, 968,750
Cost of Goods Sold, net $10,675,000
Purchases, net $11,252,500
Operating expenses 462,500

Solution Preview

Cash to cash financing refers to the financing needed for working capital which consist of receivables, inventory and payables.

Cash to cash financing = AR days + Inventory days - Payable days

a. Cash to cash in assets = AR days + Inventory days which is the number of days it takes from buying the inventory till collecting the cash

AR days = Accounts receivable/per day sales = 1,225,000/(15,968,000/365) = 28.69 days
Inventory days = Inventory/per day cost of goods sold = 875,000/(10,675,000/365) = 29.92 ...

Solution Summary

Cash-to-cash cycle for McGhee Corporations are examined.