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    Working Capital calculations for Latigo Company

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    The Latigo Company has the following financial information:

    Sales $ 200

    Cost of goods sold 100

    Administrative expense 44

    Depreciation 40

    Interest expense 2

    Tax 7

    Net profit $ 7

    Cash $ 5

    Accounts receivable 20

    Inventory 25

    Fixed assets 60

    Total $110

    Accounts payable 5

    Note payable 15

    Long-term debt 20

    Total Liab $40

    Equity $ 70

    Total Liab + Equity $110

    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.

    E. Compute the cash flow for Latigo Company.

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    Solution Preview

    a. The current assets are cash, accounts receivables and inventories. For Latigo the total current assets are 5+20+25=50. The sales are 200. The current assest to sales is 50/200=0.25. What this means is that Latigo uses $0.25 of current assets for each $ 1 of sales. The industry is 0.20. Latigo uses more current assets than the industry for each $ of sale. If we use current assets as a proxy for working capital, then Latigo uses more working apital than industry

    b. Working Capital Turnover is Sales/Working Capital. Since we ...

    Solution Summary

    The solution has details for calculating, working capital, cash conversion and operating cycle for Latigo Company