1. Basic concepts Aa During the wake of the financial crisis, Ben Bernanke, chai
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1. Basic concepts Aa During the wake of the financial crisis, Ben Bernanke, chairman of the Federal Reserve, said that "shortening the cash cycle and better use of working capital" are the most important factors as private-sector businesses struggle to overcome the current economic volatility and difficulty in accessing capital markets (IBM Global Business Services, "Managing Working Capital in the New Economic Environment," http://www-935.ibm.com/services/uk/bcs/pdf/working capital paper pdf) Considering how important working capital management is, Tun Fuels Co. decided to evaluate the amount of warking capital being used in the firm and explore the prospects of how its working capital will be financed. Tun Fuels Co, reported the following results for current assets and liabilities on its most recent balance sheets. Interestingly, the company's sales did not change-it reported sales of $16,650 for its most recent year as well as for the previous year. The columins labelled "Ending (5) show results at the end of the most recent year, and the columns labeiled "Beginning ($)"show results at the end of the previous year. Ending ($) Beginning (s) Ending (S) Beginning (s) Current labilities Current assets 7,200 4,800 7350 5.400 7,500 Accounts payable Cash Accounts receivable Inventony 7,500 S,B50 6,000 Notes payable 5,100 Accruals and net operating working capital for Tun Using the information given and a 365-day Fuels Co. Use your calculatians to complete the following statements davs at the ond of the days in the previous year to . Tun Fuels Co's days of working capital improved from moat recent year The compony's not working capital increased from $5,250.00 n tho previous year t at the end of last yea in the previous year to S250.00tr, sod of aut . Tun Fuels Co's net aperating working capitol increased trom 6,030 00 8,040.00 10,050 00 pe here to searcExplanation / Answer
A company's days working capital ratio shows how many days it takes to convert working capital into revenue. To calculate a company's days working capital, multiply its average working capital by 365, as in days in a year. Then divide that figure by its annual sales revenue. Companies that need fewer days to turn working capital into sales revenue are better off than those that take longer.
Total current assets (beginning) = Cash + accounts receivable + inventory
= 3900 + 7500 + 5850 = 17250
Total current assets (ending) =7500 + 6000 + 5100 = 18600
Total current liabilities (beginning) = accounts payable + notes payable =
= 7200 + 4800 = 12000
Total current liabilties (ending) = 7350 + 5400 = 12750
Net working capital (beginning) = 17250 - 12000 = 5250
Net working capital (ending) = 18600 - 12750 = 5850
Days of working capital (beginning) = 5250*365 / 16650 = 115
Days of working capital (ending) = 5850*365/16650 = 128
1. Tun Fuel Co.'s days of working capital improved from 115 days in the previous year to 128 days at the end of the most recent year.
2. The company's net working capital increased from $ 5250 in the previous year to $5850 at the end of last year.
3. Net operating working capital = Current assets -non-interest bearing libilites (Accounts payable)
Net operating working capital (beginning ) = 17250 - 7200 = 10050
Net operating working capital (ending) = 18600 - 7350 = 11250
Ton Fuel co.'s net operating working capital increased from $10050 in the previous year to $11250 at the end of the year.
answer 4:
Days of working capital = net working capital * 365 /total sales
Days of working capital can be reduced by either reducing the working capital or increasing the sales.
Since sales remain constant, the days of working capital can be lowered by reducing the working capital.
And working capital can be reduced by either reducing the current assets or increasing the current liabilities.
If other things remain constant, then days of working capital can be lowerd either by reducing accounts receivable and inventories and/or increasing the accounts payable.
Therefore, this statement is true for Tun Fuels Co.
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