Pottery Children, Inc. specializes in gourmet pottery products for young people and receives all income from sales. Last year, ending payables, receivables, inventory, and cash balance were exactly equal to the firm’s average historical levels of $200M, $400M, $300M, and $500M, respectively. The firm also sold $5B in revenue over the course of last year. On average, the firm’s gross profit margin is 40%, which means that the cost of goods sold (inventory purchases) is 60% of revenue, though they are purchased a quarter in advance. The firm likes to maintain a minimum balance of $400M. Other relevant expenses include the following: Wages, taxes, and other expenses are 40% of sales, which are projected to be one-fourth of last year’s total for the first quarter. Each quarter after that, sales are expected to grow by 1%. Interest and dividend payments are $50M, and major capital expenditure of $250M is expected in the second quarter. Assume the year includes 4 quarters with 90 days each.

 a. Compute the inventory and receivables periods. What is the firm’s operating and cash cycle?

b. What are cash collections and ending receivables for quarters one through four?

c. What are cash payments and total disbursements for quarters two, three and four?

d. What is the net cash flow and cumulative surplus or deficit for quarters two and three?

e. What does this imply about firm cash needs? What would the firm do about the surplus or deficit?

Answer rating: 100% (QA)

A The firms operating period is the number of days between the time they sell 5B worth of product and when they pay their vendors They have negotiated ... View the full answer