Q. Working capital mini Qs?
During January 20X4, Gazza Ltd made credit sales of £30,000 that have a 25% mark up. It also purchased £20,000 of inventories on credit.
Calculate by how much the working capital will decrease or increase as a result of above transactions?
Tuffy Ltd has an annual turnover of £18m on which it earns a marginof 20%. All sales and purchases are made on credit and it has a policy of sustaining the following levels of inventories, trade receivables and payables throughout the year.
Inventory £2 million
Trade receivable £5 million
Trade payable £2.5 million
Calculate Tuffy Ltd.'s cash cycle to the nearest day?
Solution:
Working capital mini Q's
Firstly note the difference between a marginand a mark-up
Mark-up= 100% + 25% = 125% Profit = (25 / 125) Cost = 100 / 125
Margin = 75% + 25% = 100% Profit = (25 / 100) Cost = 75 / 100
1 Effect on WC
Increase in trade receivables £30,000
Increase in trade payables (£20,000)
Inventories -increase due to purchases £20,000
Inventories -Decrease because of sales (i.e.COS)
{30,000 x 100 / 125} (£24,000)
Net effect on WC -increase £ 6,000
2 Cash cycle = inventory days + trade receivable days -trade payable days
Inventory days = (Average inventory/Cost of sales) x365
Cost of sales = £18 million x 0.8 = £14.4 million
Inventory days = £2 / £14.4 x 365 = 51 days
Trade receivable days = Trade receivable / sales x 365
= £5 / £18 x 365 = 101 days
Trade payable days = Trade payable / COS x 365
= £2.5m / £14.4 x 365 = (63) days
Cash cycle = 89 days
89 days is the average time from the payment of a supplier to the receipt from a customer.