Question 1

The current assets and current liabilities of ABC Co at the end of March 2014 are as follows:

$000 $000

Inventory 5,700

Trade receivables 6,575 12,275

Trade payables 2,137

Overdraft 4,682 6,819

Net current assets 5,456

For the year ending 31st March 2014, ABC Co had domestic and foreign sales of $40 million, all on credit, while cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.

For the year ending 31st March 2015, ABC Co has forecast that credit sales will remain at $40 million while cost of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the companys overdraft.

ABC Co also plans to achieve the following target working capital ratio values for the year ending 31st March 2015:

Inventory days: 60 days

Trade receivables day: 75 days

Trade payables days: 55 days

Current ratio: 1.4 times Required:

A. Calculate the working capital cycle (cash collection cycle) of ABC Co as at 31st March 2014 and discuss whether a working capital cycle should be positive or negative.

B. Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of ABC Co as at 31st March 2015.

C. Analyse and compare the current asset and current liability positions for March 2014 and March 2015 and discuss how the working capital financing policy of ABC Co would have changed.