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Working Capital Management for a Retailer

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1. For retailer, what are the major costs and benefits of holding inventory? what different benefits and costs apply to raw materials inventory held by manufacturer?

2. What is safety stock? Explain how it is possible that safety stock might be negative?

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Solution shows the major costs and benefits of holding inventory and different benefits and costs apply to raw materials inventory held by manufacturer.

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Analysis of Working Capital and The Cash Conversion Cycle

Use 2004 financial statements for Amazon and Barnes and Noble to perform this analysis.

Analysis of Working Capital and The Cash Conversion Cycle for Book Sellers.

The cash conversion cycle is defined as the average length of time a dollar is tied up in current assets, and it is determined by the inventory conversion period, receivables collection period, and the payables deferral period. A company wants to minimize the cash conversion cycle as much as possible. The Exercise looks at two competing booksellers. Barnes and Noble, Inc. is a hybrid between the traditional brick and mortar retailer and the internet retailer. Amazon.com represents the online retailer. You will determine the cash conversion cycles of these companies and their implications.

For this exercise you will access information from the investor Web sites for Barnes and Noble, Inc. and Amazon.com, at http://www.barnesandnobleinc.com/financials/ and http://www.amazon.com, respectively.

Go to Barnes and Noble's Web site, and click on "Annual Report." Now that you are in the annual report listing, click on the 2004 annual report: http://www.barnesandnobleinc.com/for_investors/annual_reports/annual_reports.html. From the firm's income statement, write down the annual sales and cost of goods sold for 2004. Assuming a 365-day year, what are the average daily sales and purchases for Barnes and Noble, Inc.?

Go to the firm's balance sheet. Write down the balances shown for the firm's inventories, accounts receivable, and accounts payable. Using the information from parts a and b, calculate its inventory conversion period, receivables collection period, and payables deferral period. What is Barnes and Noble's cash conversion cycle? Also calculate the operating cycle, and the net working capital.

Now, access Amazon's Web site. Scroll to the bottom of the page and click on "About Amazon.com." Next, click on "Investor Relations," and then click on "Annual Reports": http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual Click to get a copy of Amazon's 2004 Annual Report. On the income statement, find the annual sales and cost of goods sold. Again, assuming a 365-day year, calculate the average daily sales and purchases for Amazon.

From the balance sheet, record balances for inventories, accounts receivable, and accounts payable. Use this information to calculate Amazon's inventory conversion period, receivables collection period, and payables deferral period. Calculate Amazon's cash conversion cycle. Also calculate the operating cycle, and the net working capital.
Compare the cash conversion cycles of Barnes and Noble and Amazon. What factors do you think are responsible for these differences? Are these differences firm specific or are they consequences of the nature of the businesses which these firms operate? Interpret your results. Explain in words what the cash conversion cycles you calculated mean for these companies. Which company has better working capital management based on your findings?

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