Differences between working capital policies

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Reference no: EM13827564

Problem:

The following financial information relates to XYZ Co.

Income statement extracts	2011	2010
	RM000	RM000
Revenue	14,525	10,375
Cost of sales	10,458	6,640

Profit before interest and tax	4,067	3,735
Interest	355	292
Profit before tax	3,712	3,443
Taxation	1,485	1,278
Distributable profit	2,227	2,165

Statement of financial position extracts	2011		2010
	RM000	RM000	RM000	RM000
Non-current assets		15,284		14,602
Current assets
Inventory	2,149		1,092
Trade receivables	3,200		1,734
		5,349		2,826
Total assets		17,428		20,633

Current liabilities
Trade payables	2,865		1,637
Overdraft	1,500		250
		4,365		1,887
Equity
Ordinary shares	8,000		8,000
Reserves	4,268		3,541
		12,268		11,541
Long-term liabilities
7% Bonds		4,000		4,000
Total liabilities		20,633		17,428

Average ratios for the last two years for companies with similar business operations to XYZ Co are as follows:

Current ratio 1·7 times

Quick ratio 1·1 times

Inventory days 55 days

Trade receivables days 60 days

Trade payables days 85 days

Sales revenue/net working capital 10 times

Required:

(a) Critically discuss the similarities and differences between working capital policies in the following areas:

(i) Working capital investment;

(ii) Working capital financing.

Summary of problem:

This question belongs basically to Finance as well as it is about discussing the differences between working capital policies with respect to working capital investment as well as working capital financing. These questions have been answered in the solution comprehensively.

Reference no: EM13827564

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