Corporate Finance Case Study
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SUBMITTED BY: GROUP #11
The time that elapses between the purchase of raw material and the collection of the cash for the sales is referred to as the operating cycle. The length between the payment for raw material purchases and the collection of cash for sales is referred to as the cash cycle.
OPERATING AND CASH CYCLE: PURCHASE OF RAW MATERIAL
FINISHED GOODS
INVENTORY PERIOD
CASH RECEIVABLE PERIOD
ACCOUNTS RECEIVABLE PERIOD
ACCOUNTS PAYABLE PERIOD CASH PAID FOR MATERIALS
OPERATING CYCLE
CASH CYCLE
(AVERAGE INVETORY) / (ANNUAL COGS/365)
(AVERAGE DEBTORS) /(ANNUAL SALES/365)
(AVERAGE CREDITORS) /(ANNUAL COGS/365)
INVENTORY PERIOD+A/C RECEIVABLES PERIOD OPERATING CYCLE-A/C PAYABLE PERIOD
CASE 1:FINANCIAL INFORMATION FOR ZENITH Ltd. PROFIT &LOSS A/C
BALANCE SHEET DATA
BEGINNING OF 20X0
END OF 20X0
SALES
500
INVENTORY 60
64
COST OF GOODS SOLD
360
A/C RECEIVABL E
80
88
A/C PAYABLE
40
46
INVENTORY HOLDING PERIOD (AVERAGE INVENTORY)/ (COGS/365) = 62.86 DAYS A/C RECEIVABLE PERIOD (AVERAGE A/C RECEIVABLE)/(SALES/365) 61.32 DAYS A/C PAYABLE PERIOD
(AVERAGE A/C PAYABLE)/(COGS/365) 43.59 DAYS
OPERATING CYCLE
INVENTORY PERIOB+A/C RECEIVABLE 124.18
CASH CYCLE
OPERATING CYCLE-A/C PAYABLE PERIOD 80.58 DAYS
CASE 2:FINANCIAL INFORMATION FOR APEX Ltd. PROFIT &LOSS A/C
BALANCE SHEET DATA
BEGINNING OF 20X0
END OF 20X0
SALES
1000
INVENTORY 110
120
COST OF GOODS SOLD
750
A/C RECEIVABL E
140
150
A/C PAYABLE
60
66
INVENTORY HOLDING PERIOD (AVERAGE INVENTORY)/ (COGS/365) = 59.96 DAYS A/C RECEIVABLE PERIOD (AVERAGE A/C RECEIVABLE)/(SALES/365) 52.93 DAYS A/C PAYABLE PERIOD
(AVERAGE A/C PAYABLE)/(COGS/365) 30.66 DAYS
OPERATING CYCLE
INVENTORY PERIOB+A/C RECEIVABLE 108.89 DAYS
CASH CYCLE
OPERATING CYCLE-A/C PAYABLE PERIOD 78.23 DAYS
CASE 3:
(in Rs.)
Sales(at two months¶ credit)
3600,000
Materials consumed(two months credit)
900,000
Wages paid(monthly in arrear)
720,000
Manufacturing expenses outstanding (cash expenses paid one month in arrear)
80,000
Total administrative exp. Paid as incurred
240,000
Sales promotion exp., paid quarterly in Advance.
120,000
25% gross profit Depreciation as a part of cogs. One month¶s stock of raw material and finished goods Cash balance of rs. 100,000 20% as a safety margin Calculate working capital requirement on the basis of cash cost.
CURRENT ASSETS:
1) STOCK OF RAW MATERIALS
(in Rs.)
75,000
(Material cost*(time span/12) 2)STOCK OF FINISHED GOODS
215,000
(Cash manufacturing cost*(time span/12) 3)DEBTORS AT COST
490,000
(Total cash cost*(time span/12) 4)ADVANCE PAYMENT OF SALES PROMOTION EXPESE
30,000
(Paid quarterly in advance) 5)CASH BALANCE TOTAL CURRENT ASSET (A)
100,000 910,000
CURRENT LIABILITY:
1) CREDITORS
(in Rs.)
150,000
(Material cost*time span/12) 2)WAGES OUTSTANDING
60,000
(One month in arrear) 3)MANUFACTURING EXPENSE OUTSTANDING
80,000
(One month in arrears)
TOTAL CURRENT LIABILITY (B)
290,000
WORKING CAPITAL(A-B)
620,000
ADD: 20% Safety margin
124,000
WORKING CAPITAL REQUIREMENT
744,000
SUBMITTED BY: GROUP #11
The time that elapses between the purchase of raw material and the collection of the cash for the sales is referred to as the operating cycle. The length between the payment for raw material purchases and the collection of cash for sales is referred to as the cash cycle.
OPERATING AND CASH CYCLE: PURCHASE OF RAW MATERIAL
FINISHED GOODS
INVENTORY PERIOD
CASH RECEIVABLE PERIOD
ACCOUNTS RECEIVABLE PERIOD
ACCOUNTS PAYABLE PERIOD CASH PAID FOR MATERIALS
OPERATING CYCLE
CASH CYCLE
(AVERAGE INVETORY) / (ANNUAL COGS/365)
(AVERAGE DEBTORS) /(ANNUAL SALES/365)
(AVERAGE CREDITORS) /(ANNUAL COGS/365)
INVENTORY PERIOD+A/C RECEIVABLES PERIOD OPERATING CYCLE-A/C PAYABLE PERIOD
CASE 1:FINANCIAL INFORMATION FOR ZENITH Ltd. PROFIT &LOSS A/C
BALANCE SHEET DATA
BEGINNING OF 20X0
END OF 20X0
SALES
500
INVENTORY 60
64
COST OF GOODS SOLD
360
A/C RECEIVABL E
80
88
A/C PAYABLE
40
46
INVENTORY HOLDING PERIOD (AVERAGE INVENTORY)/ (COGS/365) = 62.86 DAYS A/C RECEIVABLE PERIOD (AVERAGE A/C RECEIVABLE)/(SALES/365) 61.32 DAYS A/C PAYABLE PERIOD
(AVERAGE A/C PAYABLE)/(COGS/365) 43.59 DAYS
OPERATING CYCLE
INVENTORY PERIOB+A/C RECEIVABLE 124.18
CASH CYCLE
OPERATING CYCLE-A/C PAYABLE PERIOD 80.58 DAYS
CASE 2:FINANCIAL INFORMATION FOR APEX Ltd. PROFIT &LOSS A/C
BALANCE SHEET DATA
BEGINNING OF 20X0
END OF 20X0
SALES
1000
INVENTORY 110
120
COST OF GOODS SOLD
750
A/C RECEIVABL E
140
150
A/C PAYABLE
60
66
INVENTORY HOLDING PERIOD (AVERAGE INVENTORY)/ (COGS/365) = 59.96 DAYS A/C RECEIVABLE PERIOD (AVERAGE A/C RECEIVABLE)/(SALES/365) 52.93 DAYS A/C PAYABLE PERIOD
(AVERAGE A/C PAYABLE)/(COGS/365) 30.66 DAYS
OPERATING CYCLE
INVENTORY PERIOB+A/C RECEIVABLE 108.89 DAYS
CASH CYCLE
OPERATING CYCLE-A/C PAYABLE PERIOD 78.23 DAYS
CASE 3:
(in Rs.)
Sales(at two months¶ credit)
3600,000
Materials consumed(two months credit)
900,000
Wages paid(monthly in arrear)
720,000
Manufacturing expenses outstanding (cash expenses paid one month in arrear)
80,000
Total administrative exp. Paid as incurred
240,000
Sales promotion exp., paid quarterly in Advance.
120,000
25% gross profit Depreciation as a part of cogs. One month¶s stock of raw material and finished goods Cash balance of rs. 100,000 20% as a safety margin Calculate working capital requirement on the basis of cash cost.
CURRENT ASSETS:
1) STOCK OF RAW MATERIALS
(in Rs.)
75,000
(Material cost*(time span/12) 2)STOCK OF FINISHED GOODS
215,000
(Cash manufacturing cost*(time span/12) 3)DEBTORS AT COST
490,000
(Total cash cost*(time span/12) 4)ADVANCE PAYMENT OF SALES PROMOTION EXPESE
30,000
(Paid quarterly in advance) 5)CASH BALANCE TOTAL CURRENT ASSET (A)
100,000 910,000
CURRENT LIABILITY:
1) CREDITORS
(in Rs.)
150,000
(Material cost*time span/12) 2)WAGES OUTSTANDING
60,000
(One month in arrear) 3)MANUFACTURING EXPENSE OUTSTANDING
80,000
(One month in arrears)
TOTAL CURRENT LIABILITY (B)
290,000
WORKING CAPITAL(A-B)
620,000
ADD: 20% Safety margin
124,000
WORKING CAPITAL REQUIREMENT
744,000
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