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The length of the operating cycle, from acquisition of raw material to collection of sales on account. Discuss the pattern over the last 5 years.

Please read below for detailed instructions. Here are the two companies which can be used. NOTE: you may use one for each section or the same company for both.

United States Steel, Inc. http://www.uss.com/corp/index.asp

or

ConAgra Foods http://www.conagrafoodscompany.com/corporate/index.jsp

Your project will be a brief discussion along two vectors associated with the firm approved by the instructor. You may present either one combined memo covering both vectors, or independent memos on each. In either case the project will be evaluated as one assignment.

Use 2006 public data in your computations.

Each part of the project should be in the form of a brief memo to an associate who will be joining you next week. I will not be counting words, but I would expect that anything over 1,500 words for either part, and 2,500 words in total, might be too long. There is no minimium beyond satisfactory coverage of the required point; it may be possible to complete the requirements in less than 500 words.

Part 1
The first vector I want you to address is a collection of relevant statistics (listed below) regarding the company selected. If your company has several diverse product lines, select the largest or most significant, and include a discussion of that significance.

1. The length of the operating cycle, from acquisition of raw material to collection of sales on account. Discuss the pattern over the last 5 years. If relevant, mention any changes which have occurred.

2. The lead or lag time between the average payment for raw material inventory and the collection of cash from the customer when the item produced from the raw material is sold. Has this changed significantly in the last 5 years?

3. The value per share using the abnormal earnings approach. Do not include any forecast information, confine yourself to the company financials.

4. Focus on an accounting statistic or disclosure which suggest earnings management on the part of the company. If appropriate, mention any announcements the company has made in the period.

For each statistic I expect a brief discussion of the data selected and the way the statistic was computed. Again, this should be in text form, use tables only to highlight a trend or change.

Part 2.
Selct TWO from the following questions to compose a memo on the point. Be brief. You may reference the statistics in part 1 but you should be sparing in any new statistics introduced. Again, address the memo to an associate of yours who will be joining you on the project next week. To answer the questions you may have to identify a baseline or standard for comparison.

1. Would you invest in the company's common stock? Would you invest in the company's long term debt?

2. With your graduate degree in Accounting, and assuming a comporable job offer, would you invest your career with the company, assuming a 3 to 5 year time horizon?

3. Would you suggest the company to a relative who has made different choices, say one with a high school education (and perhaps a year or two of additional education or training) who is looking for a long-term career in the non-production area (office staff, security, IT, HVAC, etc.)?

4. What is the most troublesome aspect of the financials, in terms of the risk an auditor would face? Where do the financials suggest that some extra scrutiny might be indicated?

Solution Preview

Please read below for detailed instructions. Here are the two companies which can be used. NOTE: you may use one for each section or the same company for both.

United States Steel, Inc. http://www.uss.com/corp/index.asp

or

ConAgra Foods http://www.conagrafoodscompany.com/corporate/index.jsp

Your project will be a brief discussion along two vectors associated with the firm approved by the instructor. You may present either one combined memo covering both vectors, or independent memos on each. In either case the project will be evaluated as one assignment.

Use 2006 public data in your computations.

Each part of the project should be in the form of a brief memo to an associate who will be joining you next week. I will not be counting words, but I would expect that anything over 1,500 words for either part, and 2,500 words in total, might be too long. There is no minimium beyond satisfactory coverage of the required point; it may be possible to complete the requirements in less than 500 words.

Part 1
The first vector I want you to address is a collection of relevant statistics (listed below) regarding the company selected. If your company has several diverse product lines, select the largest or most significant, and include a discussion of that significance.

I have selected the ConAgra Foods for the queries.

1. The length of the operating cycle, from acquisition of raw material to collection of sales on account. Discuss the pattern over the last 5 years. If relevant, mention any changes which have occurred.

Operating Cycle is defined as the time duration, which the firm requires to manufacture and sell the product and collect cash. Thus operating cycle refers to the acquisition of resources, conversion of raw materials into work-in-process into finished goods, conversion of finished goods into sales and collection of sales.
Larger is the operating cycle, larger will be the investment in current assets.

In practice, firms are acquiring resources on credit. To that extent, firm's need to raise working finance is reduced.
Operating Cycle (OC) = Inventory Conversion Period + Receivables Conversion Period
In days
2007 2006 2005 2004 2003
132 126 131 155 84

The pattern of the operating cycle is fluctuating. But as compared to the 2003 of 84 days of operating cycle it has increased to the 132 days in 2007. Overall operating cycle has increased which is a cause ...

Solution Summary

The length of the operating cycle, from acquisition of raw material to collection of sales on account. Discuss the pattern over the last 5 years.

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