Cash conversion cycle Consider the case of Green Melon Electronics Company:Green Melon Electronics Company is a mature firm that has a stable flow of business. The following data was taken from its financialstatements last year:Annual sales$10,500,000Cost of goods sold$8,400,000Inventory$2,800,000Accounts receivable$2,300,000Accounts payable$2,800,000Green Melon's CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table tocomplete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.)ValueInventory Conversion PeriodAverage collection periodPayables Deferral PeriodCash conversion cycleBoth the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collectionperiod uses average daily sales in its denominator. Why do these measures use different inputs?O Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at whichgoods are sold. penou uses aveiaye uaily Saies n Its uenomnaLuI. VWIny uo Liiese measures use uirerent mpuLS?O Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at whichgoods are sold.O Current assets should be divided by sales, but current liabilities should be divided by the COGS.The management at Green Melon Electronics Company wants to continue its internal discussions related to its cash management. One of the financeteam members presents the following case about Loud Noise Recordings to his cohorts:Case in DiscussionLoud Noise Recordings's management plans to finance its operations with bank loans that will be repaid as soon as cash is available. Thecompany's management expects that it will take 50 days to manufacture and sell its products and 40 days to receive payment from itscustomers. Loud Noise's CFO has told the rest of the management team that they should expect the length of the bank loans to beapproximately 90 days.Which of the following responses to the CFO's statement is most accuráte?O The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of timebetween the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bankloan by this amount of time.O The CFO's approximation of the length of the bank loans should be accurate, because it will take 90 days for the company tomanufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank.

Analysis of various periods are an integral part of financial analysis of any enterprise. They help…

Green Melon Electronics Company is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year: Annual sales $10,500,000 Cost of goods sold $8,400,000 Inventory $2,800,000 Accounts receivable $2,300,000 Accounts payable $2,800,000 Green Melon's CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value Inventory Conversion Period Average collection period Payables Deferral Period Cash conversion cycle Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? O Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.

Green Melon Electronics Company is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year: Annual sales $10,500,000 Cost of goods sold $8,400,000 Inventory $2,800,000 Accounts receivable $2,300,000 Accounts payable $2,800,000 Green Melon's CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value Inventory Conversion Period Average collection period Payables Deferral Period Cash conversion cycle Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? O Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 63P: Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture...

See similar textbooks

Similar questions

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Stricklers sales last year were 3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was 1,800,000. The firm had fixed assets totaling 535,000. Stricklers payables deferral period is 45 days. a. Calculate Stricklers cash conversion cycle. b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Stricklers managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Stricklers cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?
Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Uptons balance sheet as of December 31, 2018, is shown here (millions of dollars): Sales for 2018 were 350 million, and net income for the year was 10.5 million, so the firms profit margin was 3.0%. Upton paid dividends of 4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2019. a. If sales are projected to increase by 70 million, or 20%, during 2019, use the AFN equation to determine Uptons projected external capital requirements. b. Using the AFN equation, determine Uptons self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? c. Use the forecasted financial statement method to forecast Uptons balance sheet for December 31, 2019. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Uptons profit margin and dividend payout ratio will be the same in 2019 as they were in 2018. What is the amount of the line of credit reported on the 2019 forecasted balance sheets? (Hint: You dont need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2019 addition to retained earnings for the balance sheet without actually constructing a full income statement.)
Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: 1. Calculate the return on sales. (Note: Round the percent to two decimal places.) 2. CONCEPTUAL CONNECTION Briefly explain the meaning of the return on sales ratio, and comment on whether Juroes return on sales ratio appears appropriate.
Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the companys just completed financial statements. The following discussion took place between Lucas Hunter and Simmons controller, John Jameson, in January, after the close of the fiscal year: Lucas: Ive been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This wont look good to our shareholders. Is there anything we can do about this? John: What do you mean? The past is the past, and the numbers are in. There isnt much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucas: No, no. Im not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Lucas: This is true, but somehow I think this information should be given a much higher profile. I dont like this information being buried in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statementsomeplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John: Ive never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the ideaIll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?
The Commercial Division of Tidewater Inc. provided the following information on its cash flow from operations: The manager of the Commercial Division provided the accompanying memo with this report: From: Senior Vice President, Commercial Division I am pleased to report that we had earnings of 945,000 over the last period. This resulted in a return on invested capital of 8%, which is near our targets for this division. I have been aggressive in building the revenue volume in the division. As a result, I am happy to report that we have increased the number of new credit card customers as a result of an aggressive marketing campaign. In addition, we have found some excellent merchandise opportunities. Some of our suppliers have made some of their apparel merchandise available at a deep discount. We have purchased as much of these goods as possible in order to improve profitability. Im also happy to report that our vendor payment problems have improved. We are nearly caught up on our overdue payables balances. Comment on the senior vice presidents memo in light of the cash flow information.