Assumptions Company w as set up on the first day of this financial year. Opening

Question

Assumptions Company w as set up on the first day of this financial year. Opening debtors and creditors balances w ere $0. Base Case for Year 1 Days sales represented by current debtors' balance is 63. Annual sales are $152,000. Days purchases represented by current creditors' balance is 67. Annual purchases are $120,000. Recalculated Case for Year 1 Working from the following condensed Cash Flow Statement, recalculate the decrease in cash resources IF 'Days' in Debtors were 73 Days and 'Days' in Creditors were 69 Days Do the "Recalculated Case" by filling in the boxes

Explanation / Answer

Recalculated case Sources of funds fromprofits           3,999 Uses of funds ( Increase in Debtors)    -30,400 Increase in creditors   22,684     Total uses          - 7,716    Decrease in cashresources              - 3,717 Explanation There are few ratio formulas you have to know before solving thisproblem. To find the increase in debtors, substitute the given values in thefollowing formulas. Days in Debtors = 365 / Receivables Turnover Given in the problem, days in debtors is 73 days, meaning thecustomer pays on an average of 73 days. 73 = 365        R.T.O So, Receivables turnover is R.T.O = 365 / 73           = 5 With this receivables turnover , you can calculate receivables. Use this formula for that, Net sales = Receivablesturnover Av.receivables Plug in the value, 152,000 = Av. receivables    5 Therefore, receivables ( that is debtors) = $30,400. Calculation of payables the same way, Days payables = 365 / payables turnover Payables turnover = 365 / 69                           = 5.29 Payables ( creditors ) calculation cost of sales = 5.29 Av.payables                      120,000 = 22,684. 5.29

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