QUESTION 7 Brentwood Enterprises have asked for your assistance, providing detai

ID: 1172390 • Letter: Q

Question

QUESTION 7 Brentwood Enterprises have asked for your assistance, providing details on the short-term financial position and financial planning of the company. The following information is provided: (15 marks) . Average inventory: $1,184,000 . Average receivables: $1,809,600 . Average payables: $768,000 . Net sales: $13,950,000 . Cost of Goods Sold: $8.400,000 a) Calculate the Operating Cycle and the Cash Cycle (in days)? (6 marks) b) What are the differences between Flexible and Restrictive short-term financial policies? (4 marks) c) What factors need to be considered when choosing a financial policy? (5 marks) Explain what a Compromise Policy is.

Explanation / Answer

1) Operating Cycle= Inventory Period + Accounts Receivable Period

=365/COGS/Average Inventory+ 365/Credit Sales/Average Accounts Receivable

=365/8,400,000/1,184,000+365/13,950,000/1,809,000

=51.44+47.33

=98.77 =99 Days

2Cash Cycle = Operating Cycle -365/COGS/Average Accounts Payable

=99- (365/8,400,000/768,000)

=99-33

=66 days

Flexible

Restrictive

Large amounts of cash and securities that can be easily sold

Low cash

Greater amounts of inventory

Low inventory

Liberal Credit Policies

Stringent Credit Policies

Low short term liability

High short term liability

3) Some important factors to be considered:

Compromise policy – Borrow short term to meet peak needs, and maintain cash reserve for emergencies.