Dry Supply is a wholesaler of dry-cleaing equipment, cleaning supplies, and laun
ID: 2600265 • Letter: D
Question
Dry Supply is a wholesaler of dry-cleaing equipment, cleaning supplies, and laundry soap. the company, which is located in central Kansas, has been in business more than 50 years. Anne Schippel, business banker, has made a couple of introductory calls and knows that Dry Supply currently is owned by two sisters and is organized as an S corporation. Based on this understanding, she can begin making a preliminary assesment of the loan request.
White performing her preliminary screening of the busienss, Schippel found the typical financial profile for the industry. (See table below.)
WHOLESALE LAUNDRY AND DDRY-CLEANING EQUIPMENT AND SUPPLIES (TYPICAL FINANCIAL DATA)
ASSETS
PERCENT
ACCOUNTS RECEIVABLE
30%
INVENTORY
35%
TOTAL CURRENT ASSETS
76%
NET FIXED ASSETS
16%
LIABILITIES
PERCENT
NOTES PAYABLE (SHORT TERM DEBT)
15%
CURRENT MATURITIES OF LONG TERM DEBT
3%
ACCOUNTS PAYABLE
20%
TOTAL CURRENT LIABILITES
47%
LONG TERM DEBT
13%
TOTAL LIABILITES
65%
NET WORTH
35%
INCOME STATEMENT
PERCENT
NET SALES
100%
GROSS PROFIT
35%
OPERATING EXPENSES
32%
OPERATING PROFIT
3%
PROFIT BEFORE TAXES
2%
INSTRUCTIONS:
Answer the following questions using the operating cycle information in this chapter and the industry date shown above.
A. As a wholesaler, what is the companys operating cycle likely to involve?
B. What is the largest asset and the largest liability?
C. What risks may disrupt the operating clyce?
D. What additional questions should Anne Schippel ask, consistent with Stage One of the Commercial Lending Decisions Tree, as illistrated in the textbook Introductions?
ASSETS
PERCENT
ACCOUNTS RECEIVABLE
30%
INVENTORY
35%
TOTAL CURRENT ASSETS
76%
NET FIXED ASSETS
16%
LIABILITIES
PERCENT
NOTES PAYABLE (SHORT TERM DEBT)
15%
CURRENT MATURITIES OF LONG TERM DEBT
3%
ACCOUNTS PAYABLE
20%
TOTAL CURRENT LIABILITES
47%
LONG TERM DEBT
13%
TOTAL LIABILITES
65%
NET WORTH
35%
INCOME STATEMENT
PERCENT
NET SALES
100%
GROSS PROFIT
35%
OPERATING EXPENSES
32%
OPERATING PROFIT
3%
PROFIT BEFORE TAXES
2%
Explanation / Answer
1. As a wholesaler, operating cycle of Dry Supply will involve the time for the production of dry-cleaing equipment, cleaning supplies, and laundry soap, their sale to the retailers in the ordinary course of business and finally the receipt of cash from such retailers from whom the sale is effective. Operating cycle is the time period within which the company is able to genrate cash from the production of the goods and sale to the final consumers(retailers in this case).
2. As evident from the percentage of balance sheet items given in the question, largest asset of the company is it's inventory which is currently at 35% of the total of balance sheet. Inventory includes finished stock of dry-cleaing equipment, cleaning supplies, and laundry soap alongwith any WIP and raw materials.
Largest Liability of the company is it's accounts payable which represents the money owed to the creditors in the ordinary course of business. Accounts payable is 20% of the total balance sheet amount. In the given case, net worth of the company is 65% but the same cannot be considered as liability of the company as it includes the amount owed to the owners of the business.
3. Following risks may disrupt the operating cycle of the company:
a. if amount is not received from retailers then operating cycle will be adversely affected and the company will see shortfall in working capital.
b. If production is delayed, then there is risk of disruption of operating cycle. Since, raw material average holding period will increase.
c. In case of low sales, there is a adverse effect on the operating cycle since cash is less generated.
d. Extension of credit days in receivables or reduction is credit from payables also adversely effect the operating cycle of the company.
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