ch15 - CHAPTER15 Cashmanagement Inventorymanagement 151...

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    15-1 CHAPTER 15 Managing Current Assets Alternative working capital policies Cash management Inventory management Accounts receivable management
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    15-2 Working capital terminology Gross working capital – total current assets. Net working capital – current assets minus  non-interest bearing current liabilities. Working capital policy – deciding the level  of each type of current asset to hold, and  how to finance current assets. Working capital management – controlling  cash, inventories, and A/R, plus short-term  liability management.
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    15-3 Selected ratios for SKI Inc.                                                          SKI        Ind. Avg. Current 1.75x 2.25x Debt/Assets 58.76% 50.00% Turnover of cash & securities 16.67x 22.22x DSO (days) 45.63 32.00 Inv. turnover 4.82x 7.00x F. A. turnover 11.35x 12.00x T. A. turnover 2.08x 3.00x Profit margin 2.07% 3.50% ROE 10.45% 21.00%
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    15-4 How does SKI’s working capital  policy compare with its industry? SKI appears to have large amounts of  working capital given its level of sales. Working capital policy is reflected in  current ratio, turnover of cash and  securities, inventory turnover, and DSO. These ratios indicate SKI has large  amounts of working capital relative to its  level of sales.  SKI is either very  conservative or inefficient.
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    15-5 Is SKI inefficient or just  conservative? A conservative (relaxed) policy may be  appropriate if it leads to greater  profitability. However, SKI is not as profitable as the  average firm in the industry.  This  suggests the company has excessive  working capital.
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    15-6 Cash conversion cycle The cash conversion model focuses on the  length of time between when a company  makes payments to its creditors and when a  company receives payments from its  customers. CCC = + . Inventory conversion period Receivables collection period Payables deferral period
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    15-7 Cash conversion cycle CCC = + CCC = + CCC = + 46 – 30 CCC = 76 + 46 – 30 CCC = 92 days.
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