Due to significant changes to the financial environment in one of the main Omega's markets it is expected that the average collection period will increase to 50 days. Omega is in the process of negotiating a long-term loan and the CFO is concerned on the credit outlook of the company. The CFO has decided to reduce cash and cash equivalents to 400,000. However, further actions are needed. You are asked to examine two extreme what-if scenarios to help the CFO decide the future financial policy of Omega. The first is to decrease inventories, and the other is to hold back Omega's payments by increasing the accounts payable. Assume all other amounts as the same. Required: 1. Calculate the impact on accounts receivables of the increase of the average collection period (5%). 2. Prepare the balanced sheet of each scenario, also taking into account the reduction in cash and cash equivalents. Please prefer to report them in comparative form (10%) Calculate for each scenario the a) working capital, b) current ratio, c) acid-test ratio, d) cash to current liabilities ratio, e) days' sales in receivables (based on ending accounts receivables), f) days' sales in inventory (based on ending inventory), g) operating cycle, h) total debt to equity ratio and i) times interest earned. For your calculations, assume that a year amounts for 360 days (5%). The balance sheet and the income statement of Omega" Company containing data in is as follows: 20X1 5,500,000 1,075,000 6,575,000 Assets Fixed assets: Property, plant and equipment Less accumulated depreciation Net property, plant and equipment Total fixed assets Current assets: Cash and cash equivalents Marketable securities Accounts receivables Inventory Prepaid expenses Total current assets Balance Sheet 20X1 Liabilities & Stockholders' Equity Stockholders' equity: 11,000,000 Common stock (3,925.000) Retained earnings 7,075,000 Total stockholders' equity 7,075,000 Long-term liabilities: Long-term debt 700,000 Total long-term liabilities 800,000 Current liabilities: 1,650,000 Accounts payable 2,100,000 Short-term debt 750,000 Total current liabilities 6,000,000 Total liabilities Total liabilities & stockholders' equity 13,075,000 3,500,000 3,500,000 700,000 2.300,000 3,000,000 6,500,000 Total assets 13,075,000 Income Statement 20X1 Sales Cost of goods Gross margin Selling and administrative expenses Net operating income Interest expense Income before taxes Income taxes (25%) Net income 17,499,600 (13,000,000) 4,499,600 (3,599,600) 900,000 (400,000) 500,000 (125,000) 375,000 1. a) Working Capital ratio=Current assets- Current liabilities -6000000-3000000=3000000 b) Current Ratio Current assets/current liabilities =6000000/3000000 =2.00 c) Acid test ratio = cash & cash equivalents marketable securities-accounts receivable/ current liabilities -700000+800000+1650000/3000000 = 3150000/3000000= 1.05 d) cash to current liabilities ratio = cash & cash equivalents/current liabilities > 700000+800000/3000000=1500000/3000000=0.50 .) day's sales in receivable-ending accounts receivable / sales) *360 > -> (1650000/17499600) * 360 33.94 days day's sales in inventory=(ending inventory cost of goods sold) 360 > (2100000/13000000) 8360 58.15 days Operating cycle=day's sales in receivable-day's sales in inventory => 33.94+58.15 =92.09 days h) total debt to equity ratio=total liabilities / shareholders equity - 6500000/6575000 = 0.99 times interest earned=EBIT/interest expenses - 900000/400000 -2.25 Due to significant changes to the financial environment in one of the main Omega's markets it is expected that the average collection period will increase to 50 days. Omega is in the process of negotiating a long-term loan and the CFO is concerned on the credit outlook of the company. The CFO has decided to reduce cash and cash equivalents to 400,000. However, further actions are needed. You are asked to examine two extreme what-if scenarios to help the CFO decide the future financial policy of Omega. The first is to decrease inventories, and the other is to hold back Omega's payments by increasing the accounts payable. Assume all other amounts as the same. Required: 1. Calculate the impact on accounts receivables of the increase of the average collection period (5%). 2. Prepare the balanced sheet of each scenario, also taking into account the reduction in cash and cash equivalents. Please prefer to report them in comparative form (10%) Calculate for each scenario the a) working capital, b) current ratio, c) acid-test ratio, d) cash to current liabilities ratio, e) days' sales in receivables (based on ending accounts receivables), f) days' sales in inventory (based on ending inventory), g) operating cycle, h) total debt to equity ratio and i) times interest earned. For your calculations, assume that a year amounts for 360 days (5%). The balance sheet and the income statement of Omega" Company containing data in is as follows: 20X1 5,500,000 1,075,000 6,575,000 Assets Fixed assets: Property, plant and equipment Less accumulated depreciation Net property, plant and equipment Total fixed assets Current assets: Cash and cash equivalents Marketable securities Accounts receivables Inventory Prepaid expenses Total current assets Balance Sheet 20X1 Liabilities & Stockholders' Equity Stockholders' equity: 11,000,000 Common stock (3,925.000) Retained earnings 7,075,000 Total stockholders' equity 7,075,000 Long-term liabilities: Long-term debt 700,000 Total long-term liabilities 800,000 Current liabilities: 1,650,000 Accounts payable 2,100,000 Short-term debt 750,000 Total current liabilities 6,000,000 Total liabilities Total liabilities & stockholders' equity 13,075,000 3,500,000 3,500,000 700,000 2.300,000 3,000,000 6,500,000 Total assets 13,075,000 Income Statement 20X1 Sales Cost of goods Gross margin Selling and administrative expenses Net operating income Interest expense Income before taxes Income taxes (25%) Net income 17,499,600 (13,000,000) 4,499,600 (3,599,600) 900,000 (400,000) 500,000 (125,000) 375,000 1. a) Working Capital ratio=Current assets- Current liabilities -6000000-3000000=3000000 b) Current Ratio Current assets/current liabilities =6000000/3000000 =2.00 c) Acid test ratio = cash & cash equivalents marketable securities-accounts receivable/ current liabilities -700000+800000+1650000/3000000 = 3150000/3000000= 1.05 d) cash to current liabilities ratio = cash & cash equivalents/current liabilities > 700000+800000/3000000=1500000/3000000=0.50 .) day's sales in receivable-ending accounts receivable / sales) *360 > -> (1650000/17499600) * 360 33.94 days day's sales in inventory=(ending inventory cost of goods sold) 360 > (2100000/13000000) 8360 58.15 days Operating cycle=day's sales in receivable-day's sales in inventory => 33.94+58.15 =92.09 days h) total debt to equity ratio=total liabilities / shareholders equity - 6500000/6575000 = 0.99 times interest earned=EBIT/interest expenses - 900000/400000 -2.25