The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year. He shows you the following information:
Sparkrite Ltd: Income statements for years ended 30 September last year and this year and statements of financial position as of 30 September last year and this year. (Please see attachments)
The finance director has expressed concern at the increase in inventories and trade receivable levels and needs advice on how to better manage the company working capital.
(a) Show the managing director, by using the data given, how you would calculate ratios that could be used to measure inventories and trade receivable levels during last year and this year.
(b) Discuss the ways in which the management of Sparkrite Ltd could exercise control over:
(i) Inventory levels
(ii) Trade receivables levels.
I have reproduced the financial documents in an excel worksheet. This ...
Ratios and calculations to measure inventories and trade receivables over two sequential years. Comments and discussion of the results. Comments on the control of inventory and trade receivables.
Working Capital Management
A) Dan plans to use the preceding ratios as the starting point for discussions with SKI's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data in the table, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?
b) How can one distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current asset because it is inefficient? Does SKI's working capital policy seem appropriate?
c) Calculate SKI's cash conversion cycle, assuming all calculations use a 360-day year.
d) What might SKI do to reduce its cash and securities without harming operation?
Q 23-3 What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?
Q 23-4 From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
Q 23-5 If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?
Q 23-9 The availability of bank credit is often more important to a small firm than to a large one. Why?
Mini Case !
a) B&B tries to match the maturity of its assets and liabilities. Describe how B&B could adopt either a more aggressive or more conservative financing policy.
b) What are the advantages and disadvantages of using short-term credit as a source of financing?View Full Posting Details