Exercise 18.12 The following information relates to Termine\'s Timber Supplies:
ID: 2568182 • Letter: E
Question
Exercise 18.12 The following information relates to Termine's Timber Supplies: 31/12/05 $25 800 $13 100 $14 400 $181 250 $131 040 60 days 72 days 30 days 32 days 30 days 1/1/05 $24 600 $11 900 $12 500 Inventory on hand Debtors balance Creditors balance Credit sales for the year Cost of goods sold for the year Budgeted stock turnover Stock turnover rate in 2004 Standard credit terms for debtors Debtors turnover rate in 2004 Credit terms of suppliers Note: all inventory purchases are made on credit a Calculate the stock turnover and debtors turnover in days b Determine the length of the cash cycle. c Reconstruct the stock control account to determine the credit purchases for the year. d Calculate the creditors turnover ratio and convert it to days. e Comment on the trend in the cash cycle and the success of the firm in meeting its objectives with regards to the turnover of inventory and debtors. Compare the cash cycle to the creditors turnover rate. Are there any dangers in what is hap- pening in this business at the moment? Explain your answer fully. fExplanation / Answer
e. Comment on the Trend of Cash cycle
Stock Turnover Ratio is worse than the Budgeted Stock turnover Ratio. Stocks remains blocked for a long period which is not good for company growth. The Debtors Turnover Ratio of the company is better than the Standard credit Terms. But it may be in the case that the company has been suffering from shortage of funds due to high Stock Turnover Ratio. This Type of situation is not very healthy for any company growth. The Company should try to reduce its stock turnover ratio to cope up with the shortage of funds, so that it can achieve its objectives.
f. Comment on the Cash cycle
The company has better Creditors Turnover Ratio than the Standard Credit terms for suppliers. In my opinion, it may have an adverse effect on profitability position of company. As discussed in the Point ‘e’ the company has better debtor turnover ratio whereas the stock turnover ratio is worse than the budgeted. It may be a possibility that the company is suffering from the shortage of funds and that is why demanded early payments from customers, and made delayed payments to suppliers. In this situation, customers may have demanded higher discounts and suppliers may have charged higher prices for any purchase. This makes an adverse effect on the profitability position of the company.
a. Stock Turnover Ratio = Cost of Goods Sold Avg. Inventory Average Inventory = Opeining Inventory+ Closing nventory 2 = 24600+25800 2 = 25200 Stock Turnover Ratio = 131040 25200 = 5.2 times Stock Turnover in days = 365 Stock Turnover Ratio = 365/5.2 = 70 days (approx.) Debtors Turnover Ratio = Net Credit Sales Average Debtors Average Debtors = 11900+13100 2 = 12500 Debtors Turnover Ratio = 181250 12500 = 14.5 times Debtors Turnover in days = 365 14.5 = 25 days (approx.) b. Length of Cash Cycle = (Debtors turnover in days+ stock turnover in days- creditors turnover in days) hence, debtors turnover in days = 25 days Stock turnover in days = 70 days Creditors Turnover in days = Avg. creditors * 365 Cost of goods sold = (12500+14400)/2 * 365 131040 = 37 days (approx.) Length of Cash Cycle = 25 days+ 70days - 37days = 58 days c. Not Cleared properly. d. Creditors Turnover ratio = Cost of Goods Sold Avg. Creditors = 131040 (12500+14400)/2 = 10 times Creditors Turnover in days = 365 Creditors Turnover ratio = 365 10 = 37 Days (approx.)e. Comment on the Trend of Cash cycle
Stock Turnover Ratio is worse than the Budgeted Stock turnover Ratio. Stocks remains blocked for a long period which is not good for company growth. The Debtors Turnover Ratio of the company is better than the Standard credit Terms. But it may be in the case that the company has been suffering from shortage of funds due to high Stock Turnover Ratio. This Type of situation is not very healthy for any company growth. The Company should try to reduce its stock turnover ratio to cope up with the shortage of funds, so that it can achieve its objectives.
f. Comment on the Cash cycle
The company has better Creditors Turnover Ratio than the Standard Credit terms for suppliers. In my opinion, it may have an adverse effect on profitability position of company. As discussed in the Point ‘e’ the company has better debtor turnover ratio whereas the stock turnover ratio is worse than the budgeted. It may be a possibility that the company is suffering from the shortage of funds and that is why demanded early payments from customers, and made delayed payments to suppliers. In this situation, customers may have demanded higher discounts and suppliers may have charged higher prices for any purchase. This makes an adverse effect on the profitability position of the company.
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