MC080405647 FIN-621

ASSIGNMENT
a)

I will check the operating cycle of the company before sign the contract and will make
decision on that basis.

Operating cycle = Period to convert inventory into A/R + Period to convert A/R into Cash.

Inventory turnover (ITO) = Cost of Goods Sold / Average Inventory

= 2632500/526500
= 5 times

Inventory turnover in days = Days in year/ ITO

= 365/5
= 73 days

Converting inventory in receivables = 73 days

Debtors (Receivables) turnover = Credit sales / average receivables

= 4050000/450000
= 9 times

Debtors turnover in days = days in year / debtors turnover in times

= 365/9
= 40.56 = 41 days

Converting receivables in cash = 41 days

Operating cycle = 73+41

= 114 days

Conclusion

No I will not sign the contract because according to given data company is not in
position to pay our amounts within 90 day. Their operating cycle is greater than
90 days.
B)
Company ABC Ltd wants to obtain a long term loan at an annual rate of 10% and could use
this additional capital at the same rate of profitability as shown in the given data. As a long
term creditor, do you think that the company has the potential to pay interest @10 % per
annum?
Ans.

For this decision I will check the profitability ratio of the company and than make any
decision.

Profitability ratio

Return on Sales = (Net Income / Sales)*100

= (238500/4050000)*100
= 5.89%

Conclusion

According to given data company is not generating enough percentage of net income
from sales. In this situation company has no potential to pay 10% interest on loan
because his return on the sales is 5.89% only which is less tan 10% cost of the loan

c)

Operating Expenses

Operating expenses =Gross profit –(net income + income tax +interest charges)
= 1417500 – (238500+126000+67500)
=1417500 – 432000
= 985500