ratio. From the information on the balance sheet, I would suggest that they reduce the amount of bank borrowing because the number on liability account is high. 4. Evaluate Pearson’s management of accounts payable. Their accounts payable had good policies in place. They made payment only when the product was sold. And they made sure to not delay payments for more than 45 days to keep suppliers happy. And to keep track of inventory and the cash conversion cycle, they made sure that if there were still “unsold products after 90 days, the products had to be returned or paid for” (691). 5. Calculate Pearson’s cash conversion period. Interpret your computation. Pearson’s cash conversion period is 68 days. (See below for calculations) This means that on average they will take 68 days from paying and acquiring their inventory to receiving cash from sales. If their accounts payable policy is 30 days, then this is not a good cash conversion period. Days Inventory Outstand (DIO) = Average Inventory/COBS per day Average Inventory = Beginning inventory + ending inventory / 2 89,562 / (466,562/ 365) = 89562 / 1278 = 70 days Days Sales Outstanding (DSO) = Average Accounts Receivable / Revenue per day
Stephanie Hughes HDCS 3369 Case Study 4 Pearson Air Conditioning & Service Average Accts Rec = Beginning accts rec + ending accts rec / 2 56753 / (727679 / 365) = 56753 / 1994 = 28 Days Days Payables Outstanding (DPO) = Average AP/COGS per day Average Accts Payable = beginning AP + ending AP / 2 38585 / (466562 / 365) = 38585 / 1278 = 30 days Cash conversion period DIO + DSO – DPO = 68 days 6. How could Pearson Air Conditioning & Service improve its working capital situation? They need to increase their earning profits as this will increase current assets and decrease current liabilities. They could also incorporate stocks and issue them and they could collect more account receivables. Although, they would need to update their systems first. As stated above, they need to reduce the amount of bank borrowing and they need to reassess the management of inventory.
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- Fall '13