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?
McGhee Corporation. Balance Sheet, December 31, 2003.
Accounts receivable $1,225,000
Current assets $2,240,000
Net Fixed assets $2,135,000
Total Assets $4,375,000
Accounts payable $700.000
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
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
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 ...
Cash-to-cash cycle for McGhee Corporations are examined.