Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent profit and loss account and balance sheet of the company are as follows:

The debtors and creditors were maintained at a constant level throughout the year.

(a) Explain why Hercules Wholesalers Ltd is concerned about its liquidity position.

(b) Explain the term ‘operating cash cycle’ and state why this concept is important in the financial management of a business.

(c) Calculate the operating cash cycle for Hercules Wholesalers Ltd based on the information above. (Assume a 360-day year.)

(d) State what steps may be taken to improve the operating cash cycle of the company.

Transcribed Image Text:

Profit and loss account for the year ended 31 May 19X2 Sales Less: Cost of sales 452,000 Opening stock 125,000 Add purchases 341,000 466,000 Less: Closing stock 143,000 323,000 Gross profit 129,000 Expenses 132,000 Net loss for the period (3,000) Balance sheet as at 31 May 19X2 Fixed assets Freehold premises at valuation Fixtures and fittings at cost less depreciation Motor vehicles at cost less depreciation 280,000 25,000 52,000 357,000