The Alpha One Company was started in 2006. The company manufactures components f
ID: 1172333 • Letter: T
Question
The Alpha One Company was started in 2006. The company manufactures components for personal decision assistant (PDA) products and for other hand-held electronic products. A difficult operating year 2007 was followed by a profitable 2008. However, the founders are still concerned about the venture’s liquidity position and the amount of cash being used to operate the firm. Following are income statements and balance sheets for the Alpha One Company for 2007 and 2008.
ALPHA ONE COMPANY
2007 2008
Net Sales $900,000 $1,500,000
Cost of Goods Sold 540,000 900,000
Gross Profit 360,000 600,000
Marketing 90,000 150,000
General & Administrative 250,000 250,000
Depreciation 40,000 40,000
EBIT (20,000) 160,000
Interest 45,000 60,000
Earnings Before Taxes (65,000) 100,000
Income Taxes 0 25,000
Net Income (Loss) ($65,000) $75,000
2007 2008
Cash $50,000 $20,000
Accounts Receivables 200,000 280,000
Inventories 400,000 500,000
Total Current Assets 650,000 800,000
Gross Fixed Assets 450,000 540,000
Accumulated Depreciation-100,000 -140,000
Net Fixed Assets 350,000 400,000
Total Assets $1,000,000 $1,200,000
Accounts Payable $130,000 $160,000
Accruals 50,000 70,000
Bank Loan 90,000 100,000
Total Current Liabilities 270,000 330,000
Long-Term Debt 300,000 400,000
Common Stock 150,000 150,000
Paid-in-Capital 200,000 200,000
Retained Earnings 80,000 120,000
Total Liab. & Equity $1,000,000 $1,200,000
How many months Alpha One can survive without external financing.
How long is the inventory-to-sale conversion period for 2008?
How long is the sale-to-cash conversion period for 2008?
How long is the purchase-to-payment conversion period for 2008?
Determine the length of the Alpha One’s cash conversion cycle for 2008.
Interpret the meaning of the result you obtained from question (E).
8.
A) Cash Build = = $1,500,000 - $80,000 = $1,420,000
Cash Burn = = ($900,000 + + $250,000 + $150,000 + $60,000 + $25,000 + $100,000 – ($20,000 + $30,000) + $90,000 = $1,525,000
Net cash burn = 1,525,000 – 1,420,000 = 105,000
Monthly net cash burn = 8,750
Months to survive = 20,000/8,750 = 2.29 months
B) Inventory to sale conversion period = (($400,000 + 500,000)/2)/($900,000/365) = 182.50 days
C) Sale to cash conversion period = (($200,000 + $280,000)/2)/($1,500,000/365) = 58.40 days
D) Purchase to payment conversion period
= (($130,000 + $160,000)/2 + ($50,000 + $70,000)/2)/($900,000/365) =
83.14 days
Cash conversion cycle = 182.50 days + 58.40 days – 83.14 days = 157.76 days
The venture has 157.76 days of operation that must be externally financed.
can you enplain in step by step by formula please? I can not understand what my lecture tried to answer like this
Explanation / Answer
1) How many months Alpha one can survive without external financing In this case we have to find out we the company doesn’t take any external financing and based on internal financing i.e cash generated interenally the company can survive So in this we will have to find the free cash flow of Alpha One Cash Inflow or cash build Sales - Changes in receivables 1500000 -(280000-200000) 1500000-80000 $1420000 Sales would tell us the earnings for the year and with change in receivables we can come to know the credit sales for the year and calculate actual cash sales Cash Burn or outflow All Expenses Incurred $900,000 + + $250,000 + $150,000 + $60,000 + $25,000 + $100,000 – ($20,000 + $30,000) + $90,000 $1525000 Net cash burn Cash Burn - Cash Build 1525000-1420000 105000 Monthly net cash burn rate $ 105000 is the yearly net cash burn rate, monthly rate would be = 105000/12 8750 Months to survive Now we have cash of $ 20000, this cash would work for 20000/8750 2.285714 2.29 months How long is the inventory-to-sale conversion period for 2008? In this ratio we have to calculate how much time is takes for the inventory to turn into sales Average Inventory / Cost of Goods Sold/365 Average Inventory = Opening Inventory + Closing inventory /2 (400000+500000)/2 450000 Daily Cost of Goods sold 900000/365 2465.753 Inventory to sale conversion 450000/2465.753 182.5 182.50 Days How long is the sale-to-cash conversion period for 2008? In this ratio we calculate how much time it takes for the sales to convert into cash Average Receivables / (Sales/365) Average Receivables Opening Receivables + Closing receivables /2 200000+280000/2 240000 Daily Sales 1500000/365 4109.589 Sales to cash conversion 240000/4109.589 58.4 58.40 days How long is the purchase-to-payment conversion period for 2008? Here we calculate the time it takes for purchase to be converted into payment (Average Payables + Average accruals)/(Cost of goods sold/365) Average Payables 160000+130000/2 145000 Average Accruals (50000+70000)/2 60000 Purchase to payment conversion (145000+60000)/2465.753 83.1389 83.14 Days Determine the length of the Alpha One’s cash conversion cycle for 2008. Here we have to calculate days it takes for cash to convert into inventory and accounts payable, through sales and receivables and back to cash Invetory to sale conversion + Sales to cash conversion+ purchase to payment converion 182.50+58.40+83.14 324.04 324.04 days
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