Question
TGA is a pharmaceutical company. The company has been having challenges in the management of its working capital and has decided to examine its performance.
TGA is a pharmaceutical company. The company has been having challenges in the management of its working capital and has decided to examine its performance. Its financial statement for year ending December 31, 2019 are as follows:
Statement of Financial Position as at December 31, 2019 | |
Assets | |
Cash and marketable securities | 142,000 |
Accounts receivables | 1,138,000 |
Inventories | 1,827,000 |
3,107,000 | |
Plant and Equipment | 3,577,000 |
Total Assets | 6,684,000 |
Liabilities & Equity | |
Accounts payables | 1,166,000 |
Accrued expenses | 1,029,000 |
2,195,000 | |
Long term debts and other liabilities | 2,736,000 |
Common stock | 105,000 |
Retained earnings | 1,648,000 |
Total Liabilities & Equity | 6,684,000 |
Income Statement for the year ended 31 December 2019 | |
Net Sales | 13,644,000 |
Cost of sales | 9,890,000 |
Selling and administrative expenses | 2,264,000 |
Other expenses | 812,000 |
Total expenses | 12,966,000 |
Earnings before tax | 678,000 |
Taxes | 268,000 |
Earnings after tax | 410,000 |
Note:
- 50% of annual sales are credit sales
- Assume that average inventory, receivables and payables are the same as the ending values.
- Industry Averages are: inventory conversion period 75 days; Average collection period 55 days; average payment period 60 days; current ratio 1.9 and quick ratio 1.5.
Required:
- Determine the cash conversion cycle of TGA. (show all workings)
- Comment on the management of working capital by TGA relative to the average firm in the industry.
- Evaluate the liquidity position of TGA relative to the average firm in the industry (consider the current ratio and quick ratio)
- TGA Co plans to change working capital policy in order to improve its profitability. This policy change will not affect the current levels of credit sales, cost of sales or cash and marketable securities, however accrued expenses are expected to reduce by 80%. As a result of the policy change, the following working capital ratio values are expected:
Inventory days 50 days
Trade receivables days 55 days
Trade payables days 45 days
For the change in working capital policy, calculate the change in the cash operating cycle and the effect on the current ratio. Comment on your findings.
- Discuss THREE techniques that TGA Co could use in managing trade receivables.
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