Answer The Following Questions And Solve The Following

Answer The Following Questions And Solve The Followi

Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_7_Problem_Set.docx (where flastname is your first initial and your last name), and submit it to the appropriate Dropbox. Chapter 26 (page 903): 1. Answer the following questions: a. What is the difference between a firm’s cash cycle and its operating cycle? b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal? c. How will a firm’s cash cycle be affected if a firm begins to take the discounts offered by its suppliers, all else being equal? 4. The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below: THE GREEK CONNECTION Balance Sheet As of December 31, 2012 (in $ thousand) Assets Liabilities and Equity Cash Accounts receivable Inventory $ 2,300 Accounts payable Notes payable Accruals $ 1,220 Total current assets $ 7,250 Total current liabilities Long-term debt $ 3,000 Net plant, property, and equipment $ 8,500 Total liabilities Common equity $ 6,030 Total assets $ 15,750 Total liabilities and equity $ 15,750 a. Calculate The Greek Connection’s net working capital in 2012. b. Calculate the cash conversion cycle of The Greek Connection in 2012. c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2012 if it had matched the industry average for accounts receivable days? 5. Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30. Chapter 27 (page 925): 1. Which of the following companies are likely to have high short-term financing needs? Why? a. A clothing retailer b. A professional sports team c. An electric utility d. A company that operates toll roads e. A restaurant chain 2. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm’s seasonal working capital needs the greatest? When does it have surplus cash?

Paper For Above instruction

The assigned set of questions addresses fundamental aspects of financial management, focusing on working capital, cash cycle management, and corporate governance principles. This analysis is essential for understanding how firms manage liquidity and operational efficiency, as well as the governance structures that ensure managerial accountability.

Differences Between a Firm’s Cash Cycle and Operating Cycle

The operating cycle and cash cycle are vital concepts in financial management, particularly in working capital management. The operating cycle is the period it takes for a company to purchase inventory, sell products, and collect cash from sales. It encompasses the inventory period and accounts receivable period, measuring how long it takes to convert raw materials into cash received from customers (Brigham & Ehrhardt, 2016). Conversely, the cash cycle, also known as the net operating cycle, subtracts the accounts payable period from the operating cycle. It reflects the actual time lag between cash outflows for inventory purchases and inflows from customer payments (Ross, Westerfield, Jaffe, & Jordan, 2019). Essentially, while the operating cycle measures the time taken to convert inventory into receivables, the cash cycle accounts for the timing differences in payable settlements, thereby providing a clearer picture of a firm's liquidity management.

Impact of Inventory Increase on Cash Cycle

If a firm increases its inventory holdings, all else being equal, its cash cycle will lengthen. This is because higher inventory levels extend the inventory period—the duration it takes for inventory to convert into sales (Gitman, Juchau, & Flanagan, 2015). A longer inventory period delays cash inflows and thus increases the time a firm’s funds are tied up in inventory before converting into receivables and eventually cash. Consequently, the cash cycle, which depends on the sum of days inventory held plus days receivables minus days payable, will increase, negatively impacting liquidity by prolonging the period funds are unavailable for other uses (Brigham & Ehrhardt, 2016).

Effect of Taking Supplier Discounts on Cash Cycle

When a firm begins to take advantage of supplier discounts, all else being equal, the cash cycle will decrease. This is because paying earlier and taking discounts reduces accounts payable days, shortening the payable period (Ross et al., 2019). As a result, the firm reduces the time it takes to settle obligations, which contributes to a shorter cash cycle. While this may temporarily decrease liquidity by requiring earlier payments, it can be a strategic move to improve supplier relationships and possibly secure better terms in the future (Gitman et al., 2015).

Case Study: The Greek Connection

The Greek Connection’s financial statements reveal its working capital characteristics and cash conversion efficiency for 2012. The net working capital (NWC) is calculated as current assets minus current liabilities, reflecting the liquidity available for funding daily operations.

Given current assets of $7,250,000 and current liabilities of $4,440,000 (accounts payable of $1,220,000, accruals, and other current liabilities implied), the net working capital is:

NWC = $7,250,000 - $4,440,000 = $2,810,000 (Brigham & Ehrhardt, 2016).

Next, the cash conversion cycle (CCC) is determined by adding days inventory and days receivables, then subtracting days payable. The calculation involves dividing inventory and receivables by daily sales and accounts payable by daily purchases. Assuming sales are $32 million with cost of goods sold at $20 million, and total current assets of $7,250,000, the days calculations follow:

Average daily sales = $32 million / 365 ≈ $87,671, and COGS daily = $20 million / 365 ≈ $54,794.

Days receivable = Accounts receivable / daily sales, and given the average receivable level and turnover, approximate days receivable are calculated as:

Days receivable ≈ (Accounts receivable) / (sales / 365) = ($1,220,000) / ($87,671) ≈ 13.9 days.

Similarly, days inventory = Inventory / (COGS / 365) = ($2,300,000) / ($54,794) ≈ 42 days.

Days payable are calculated based on payables and COGS, roughly:

Days payable = Accounts payable / (COGS / 365) = ($1,220,000) / ($54,794) ≈ 22.3 days.

Now, the cash conversion cycle = Days inventory + Days receivable - Days payable ≈ 42 + 13.9 - 22.3 ≈ 33.6 days.

If The Greek Connection matched the industry average accounts receivable days (30 days), the receivable days would decrease slightly, leading to a CCC of approximately:

Adjusted CCC ≈ 42 + 30 - 22.3 ≈ 49.7 days.

This increase indicates a longer cycle in adjusting to industry standards, thus impacting liquidity and operational planning.

Cost of Trade Credit

The credit terms 3/5, Net 30 imply a 3% discount if paid within five days; otherwise, the net amount is due in 30 days. If the firm does not take the discount and pays on day 30, the implicit annual cost of trade credit can be approximated by considering the forgone discount as a financing cost.

The formula for the cost of trade credit is:

Cost = (Discount % / (1 - Discount %)) * (360 / (Net days - Discount period))

Substituting values: Cost = (0.03 / (1 - 0.03)) (360 / (30 - 5)) ≈ (0.03 / 0.97) (360 / 25) ≈ 0.0309 * 14.4 ≈ 0.445 or 44.5% annually (Higgins, 2012).

This high rate demonstrates the financial benefit of taking early payment discounts, assuming the firm can meet the discount deadline without impacting cash flow adversely.

High Short-term Financing Needs

Companies like a clothing retailer, a professional sports team, and a restaurant chain are likely to have high short-term financing needs due to their seasonal sales patterns, inventory cycles, and working capital requirements (Ross et al., 2019). For example, retailers face increased inventory and receivables before holiday seasons, while sports teams often need funds for event-related expenses or player acquisitions. Electric utilities and toll road operators, with relatively stable revenue streams, typically have lower short-term financing needs.

Seasonal Working Capital Needs

Sailboats Etc. exhibits financial forecasts and working capital levels that fluctuate throughout the year. The firm’s greatest seasonal working capital needs occur during months when sales peak, typically late spring and summer, requiring higher inventory levels and receivables. Conversely, surplus cash periods likely align with off-peak months, such as winter, when sales are lower, and working capital requirements decrease (Gitman et al., 2015). Recognizing these seasonal patterns enables better cash flow management and financing strategies.

Conclusion

Financial management involves balancing operational efficiency with liquidity and capital structure. Understanding the differences between operating and cash cycles highlights how inventory and payable management influence liquidity. For firms like The Greek Connection, maintaining optimal working capital levels and aligning cash conversion cycles with industry standards are critical for sustained operations. Moreover, strategic use of trade credit and awareness of seasonal working capital needs can optimize cash flows, reduce costs, and support growth objectives. As future professionals, understanding these principles will facilitate informed decision-making, contributing to the financial health and competitiveness of organizations.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of Managerial Finance (7th ed.). Pearson.
• Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill Education.
• Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. D. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
• Hebda, T. (2013). Healthcare Information Systems: A Practical Approach for Healthcare Management (6th ed.). John Wiley & Sons.
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