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Session4 - AFP Learning System Treasury Session 4 Module 2...

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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 1 AFP Learning System: Treasury Session 4 Module 2: Financial Concepts and Analysis & Working Capital
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 2 Session 4, Module 2: Working Capital Chapter 6: Philosophy of Working Capital Chapter 7: Working Capital Tools
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 3 Chapter 6: Philosophy of Working Capital—Outline Overview of Working Capital (WC) Management WC Management Investing and Financing Strategies Basics of Short-Term Credit Costs and Risks of Alternative Debt Maturities Financing Strategies of Multidivisional and Multinational Companies Cash Discount Calculations
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 4 Cash Flow Cycle of a Business Purchase of Materials Payment for Materials Sale of Product Collect A/R Days’ Inventory Cash Conversion Cycle Days’ Receivables Days’ Payables Day 1 Day 30 Day 45 Day 75
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 5 Working Capital Cash Flow Cycle: Cash Conversion Cycle Inventory Days' Inventory = × 365 Days Cost of Goods Sold Accounts Receivable Days' Receivables = × 365 Days Annual Sales Accounts Payable Days' Payables = × 365 Days Cost of Goods Sold Cash Conversion Cycle = Days' Inv. + Days' Recs. - Days' Payables Formulas for three time periods are necessary to calculate the cash conversion cycle.
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 6 Working Capital Cash Flow Cycle: Cash Conversion Cycle Assume that a company has: $2,500,000 in annual sales $1,200,000 total cost of goods sold $360,000 in inventory on average $150,000 in accounts receivable on average $120,000 in accounts payable on average What is the company’s average days’ inventory, days’ receivables and days’ payables, and what is the company’s cash conversion cycle time?
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 7 Working Capital Cash Flow Cycle: Cash Conversion Cycle Inventory Days' Inventory = × 365 Days Cost of Goods Sold $360,000 = × 365 Days = 109.5 Days $1,200,000 Accounts Receivable Days' Receivables = × 365 Days Annual Sales $150,000 = × 365 Days = 21.9 $2,500,000 Days
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 8 Accounts Payable Days' Payables = × 365 Days Cost of Goods Sold $120,000 = × 365 Days = 36.5 Days $1,200,000 Cash Conversion Cycle = Days' Inv. + Days' Recs. - Days' Payables = 109.5 Days + 21.9 Days - 36.5 Days = 94.9 Days Working Capital Cash Flow Cycle: Cash Conversion Cycle
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v1.1 © 2004 Association for Financial Professionals. All rights reserved. Session 4: Module 2, Chapter 6 - 9 Discussion Question Answer: Current assets: As sales increase, credit sales also increase, resulting in larger dollar amounts invested in A/ R.
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