Tutorial 3: Working Capital ManagementExtracts from the recent financial statements of Bold Co are given below:RevenueCost of salesGross profitNon-current assetsCurrent assetsInventoryTrade receivablesTotal assetsEquityOrdinary sharesReservesNon-current liabilitiesBondsCurrent liabilitiesTrade payablesOverdraftTotal equity and liabilities(RM'000)4,5003,5001,0001,0003,0003,000Trade payables daysSales revenue/net working capital(1)(ii)(RM'000)21,30016,4004,900: 85 days: 10 times(RM'000)3,0008,00011,000A factor has offered to manage trade receivables of Bold Co in a servicing and factor-financingagreement. The factor expects to reduce the average trade receivables period of Bold Co fromits current level to 35 days; to reduce bad debts from 0.9% of revenue to 0.6%; and save BoldCo RM40,000 per year in administration costs. The factor would also make an advance to BoldCo of 80% of the revised book value of trade receivables. The interest rate on the advance wouldbe 2% higher than the 7% that Bold Co currently pays on its overdraft. The factor would chargea fee of 0.75% of revenue on a with-recourse basis, or a fee of 1.25% revenue on a non-recoursebasis. Assume that there are 365 working days in each year and that all sales and supplies areon credit.2,000Average ratios for companies with similar business operations to Bold Co. are as follows:Current ratio: 1.7 timesQuick ratio: 1.1 timesInventory days: 89 daysTrade receivables days: 60 daysd) Calculate the value of factor's offer:On a with-recourse basis;On a non-recourse basis.3,0006,00011,000Required:a) Explain the meaning of the term 'cash operating cycle and discuss the relationshipbetween cash operating cycle and the level of investment in working capital. Youranswer should include a discussion of relevant working capital policy and the nature ofbusiness operations.b) Calculate the cash operating cycle of Bold Co. (Ignore the factor's offer in this part of thequestion).c) Using suitable working capital ratios and analysis of the financial information provided,evaluate the financial health of Bold Co..

The cash operational cycle is a financial term that assesses how long it takes a business to convert…

Required: a) Explain the meaning of the term 'cash operating cycle and discuss the relationship between cash operating cycle and the level of investment in working capital. Your answer should include a discussion of relevant working capital policy and the nature of business operations. b) Calculate the cash operating cycle of Bold Co. (Ignore the factor's offer in this part of the question). c) Using suitable working capital ratios and analysis of the financial information provided, evaluate the financial health of Bold Co.

Required: a) Explain the meaning of the term 'cash operating cycle and discuss the relationship between cash operating cycle and the level of investment in working capital. Your answer should include a discussion of relevant working capital policy and the nature of business operations. b) Calculate the cash operating cycle of Bold Co. (Ignore the factor's offer in this part of the question). c) Using suitable working capital ratios and analysis of the financial information provided, evaluate the financial health of Bold Co.

College Accounting, Chapters 1-27

23rd Edition

ISBN:9781337794756

Author:HEINTZ, James A.

Publisher:HEINTZ, James A.

Chapter24: Analysis Of Financial Statements

Section: Chapter Questions

Problem 2SEA

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