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Working Capital

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1) For the Morton Inc Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what is the length of the firms cash conversion cycle?
a. 87 days
b. 90 days
c. 65 days
d. 48 days
e. 66 days

2) Other things held constant, which of the following will cause an increase in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.

3) A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount? (Assume a 365-day year.)
a. 21.71%
b. 22.07%
c. 22.95%
d. 23.48%
e. 24.52%

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Solution Preview

1. Cash Conversion Cycle = AR Days + Inventory Days - AP Days
Cash Conversion Cycle = 60+72-45 = 87 days

2. c Merchandise is sold at a profit, but the ...

Solution Summary

The solution has problems in cash conversion cycle, impact on working capital and cash discounts

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See Also This Related BrainMass Solution

1. Two companies, A and B, have the following balance sheet accounts:

BELOW ARE TWO PROBLEMS THAT I NEED SOLVED. I HAVE ALSO ATTACHED A WORD DOCUMENT WITH THE PROBLEMS IN FORMAT THAT IS EASIER TO UNDERSTAND. THEY ARE ALSO LOCATED IN PDF FORMAT ON PAGE 170 THANKS.

1. Two companies, A and B, have the following balance sheet accounts:
A B
Current assets $ 150 $ 800
Fixed assets 300 2200
Current liabilities 75 600
Long-term debt 75 1000
Equity 300 1400
a. Compute values for all of the ratios that measure working capital for firms A
and B.
b. Compare Firm A to B with regards to its need for working capital and how it
finances its working capital (short-term vs. long-term financing).

2. 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 50
Accounts payable 5
Note payable 15
Long-term debt 20
Equity 70
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.

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