The following scenario relates to questions 1–5.

CASE SCENARIO

PKA Co is a European company that sells goods solely within Europe. The recently appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable.

Inventory management

The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is $250, while the cost of holding a unit in stores is $0.50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Accounts receivable management

Customers are allowed 30 days' credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed.

REQUIREMENT

In order to improve the management of receivables, PKA Co is considering using a debt factor on a 'with-recourse' basis.

Which of the following are benefits of 'with-recourse' factoring for PKA Co?

1. A fall in bad debts
2. A reduction in accounts receivable staffing costs
3. An improvement in short-term liquidity

The following scenario relates to questions 1–5.

CASE SCENARIO

PKA Co is a European company that sells goods solely within Europe. The recently appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable.

Inventory management

The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is $250, while the cost of holding a unit in stores is $0.50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Accounts receivable management

Customers are allowed 30 days' credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed.

REQUIREMENT

What are the best ways for PKA Co to improve the management of accounts receivable?

1. Assess the creditworthiness of new customers
2. Introduce early settlement discounts
3. Take legal action against the slow payers and non-payers

The following scenario relates to questions 1–5.

CASE SCENARIO

PKA Co is a European company that sells goods solely within Europe. The recently appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable.

Inventory management

The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is $250, while the cost of holding a unit in stores is $0.50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Accounts receivable management

Customers are allowed 30 days' credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed.

REQUIREMENT

What is the economic order quantity?

The following scenario relates to questions 1–5.

CASE SCENARIO

PKA Co is a European company that sells goods solely within Europe. The recently appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable.

Inventory management

The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is $250, while the cost of holding a unit in stores is $0.50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Accounts receivable management

Customers are allowed 30 days' credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed.

REQUIREMENT

What is the current minimum inventory level at PKA Co?

The following scenario relates to questions 1–5.

CASE SCENARIO

PKA Co is a European company that sells goods solely within Europe. The recently appointed financial manager of PKA Co has been investigating working capital management objectives and the working capital management of the company, and has gathered the following information about the inventory policy and accounts receivable.

Inventory management

The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is $250, while the cost of holding a unit in stores is $0.50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Accounts receivable management

Customers are allowed 30 days' credit, but the financial statements of PKA Co show that the average accounts receivable period in the last financial year was 75 days. This is in line with the industry average. The financial manager also noted that bad debts as a percentage of sales, which are all on credit, increased in the last financial year from 5% to 8%. The accounts receivables department is currently short staffed.

REQUIREMENT

What are the main objectives of working capital management at PKA?

1. To ensure that PKA Co has sufficient liquid resources
2. To increase PKA Co's profitability
3. To ensure that PKA Co's assets give the highest possible returns

The following scenario relates to questions 1–5.

CASE SCENARIO

Plot Co sells Product P with sales occurring evenly throughout the year.

Product P

The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month's sales is maintained.

Other information

Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

REQUIREMENT

If Plot Co were overtrading, which TWO of the following could be symptoms?

The following scenario relates to questions 1–5.

CASE SCENARIO

Plot Co sells Product P with sales occurring evenly throughout the year.

Product P

The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month's sales is maintained.

Other information

Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

REQUIREMENT

Plot Co managers are considering the cost of working capital management.

Which of the following statements about working capital management are True?

1. A conservative working capital finance approach is low risk but expensive.
2. Good working capital management adds to the wealth of shareholders.

The following scenario relates to questions 1–5.

CASE SCENARIO

Plot Co sells Product P with sales occurring evenly throughout the year.

Product P

The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month's sales is maintained.

Other information

Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

REQUIREMENT

Plot Co is considering offering a 2% early settlement discount to its Currently sales are $10m and customers take 60 days to pay. Plot Co estimates half the customers will take up the discount and pay cash. Plot is currently financing working capital using an overdraft on which it pays a 10% charge. Assume 365 days in a year.

What will be the effect of implementing the policy?

The following scenario relates to questions 1–5.

CASE SCENARIO

Plot Co sells Product P with sales occurring evenly throughout the year.

Product P

The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month's sales is maintained.

Other information

Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

REQUIREMENT

What is the total annual cost of a policy based on using the economic order quantity (EOQ)? (to the nearest $100)

$______

The following scenario relates to questions 1–5.

CASE SCENARIO

Plot Co sells Product P with sales occurring evenly throughout the year.

Product P

The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month's sales is maintained.

Other information

Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.

REQUIREMENT

What is the total annual cost of the current purchasing policy? (to the nearest whole number)

$_____

The following scenario relates to questions 1–5.

CASE SCENARIO

The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading.

The following extract financial information relates to the last two years:

REQUIREMENT

Gorwa Co's net working capital (ie current assets less current liabilities) is most likely to increase in which of the following situations?

The following scenario relates to questions 1–5.

CASE SCENARIO

The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading.

The following extract financial information relates to the last two years:

REQUIREMENT

Gorwa Co is concerned about overtrading.

Which TWO of the following are symptoms of overtrading?

The following scenario relates to questions 1–5.

CASE SCENARIO

The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading.

The following extract financial information relates to the last two years:

REQUIREMENT

Which of the following statements are FALSE for Gorwa Co?

The following scenario relates to questions 1–5.

CASE SCENARIO

The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading.

The following extract financial information relates to the last two years:

REQUIREMENT

What is the increase in inventory days between 20X6 and 20X7? (to the nearest whole day)

______ days

The following scenario relates to questions 1–5.

CASE SCENARIO

The financial manager of Gorwa Co is worried about the level of working capital and that the company may be overtrading.

The following extract financial information relates to the last two years:

REQUIREMENT

What is the sales/net working capital ratio for 20X7? (to two decimal places)

_____ times

The following scenario relates to questions 1–5.

CASE SCENARIO

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

REQUIREMENT

Management at Cat Co are considering an aggressive approach to financing working capital.

Which of the following statements relate to an aggressive approach to financing working capital management?

1. All non-current assets, permanent current assets and part of fluctuating current assets are financed by long-term funding.
2. There is an increased risk of liquidity and cash flow problems.

The following scenario relates to questions 1–5.

CASE SCENARIO

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

REQUIREMENT

Cat Co is reviewing its working capital management.

Which TWO of the following statements concerning working capital management are correct?

The following scenario relates to questions 1–5.

CASE SCENARIO

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

REQUIREMENT

Cat Co has annual credit sales of $25m and accounts receivable of $5m. Working capital is financed by an overdraft at 10% interest per Assume 365 days in a year.

What is the annual finance cost saving if Cat Co reduces the collection period to 60 days? (to the nearest whole number)

The following scenario relates to questions 1–5.

CASE SCENARIO

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

REQUIREMENT

What is the total annual inventory cost if Cat Co orders 30,000 components at a time?

The following scenario relates to questions 1–5.

CASE SCENARIO

Cat Co places monthly orders with a supplier for 10,000 components which are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which Cat Co meets, and the cost per component is $7.50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1.00 per component per year.

The supplier has offered a discount of 3.6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2.20 per component per year due to the need for a larger storage facility.

REQUIREMENT

What is the current total annual cost of inventory?