Working Cycle

1.      Stages of Working capital cycle

a)      Obtaining cash

b)      Purchasing raw materials

c)      Making sales

2.      Components of a working capital management strategy

a)      Current Assets – these are items that can be converted into cash at a fast rate. It is important to obtain these monies so as to reinvest them for future profit. It is also necessary to ensure that the inventory is kept at a level which is optimum to avoid extra storage costs when in excess and to avoid losing customers when they are deficient.

b)      Current liabilities – it is important for the company to ensure that its current liabilities are met within a year’s time to reduce their servicing costs. It is however important to increase the credit days of its payables to ensure that there are no cash flow problems due to reduced liquidity.

3.      Types of unsecured bank loans

a)      Revolving line of credit – it involves an arrangement between the financial institution and the borrower in which the borrower is allowed access to an amount of series of credit in which they can pay back in flexible amounts for example credit cards.

b)      Fixed interest installment loans  this is a loan which is paid back in periodic installments at a fixed interest rate

4.      Medical records provide an account of the type of treatment as well as the cost of the treatment given to each patient. It therefore enables the billing process to have adequate data for sales processing and its relevant accounting treatments.

5.      Alternatives for short term investments

a)      Marketable equity securities

This includes equity instruments such as common stock or preference stock. They are highly liquid as one can sell or purchase them when he wants

b)      Marketable debt securities

This includes acquiring short term government or corporate bonds which promise a return at the end of the maturity period.

c)      Short term paper

This includes an investment with a maturity period of nearly 270 days. It includes Treasury bills, promissory notes and commercial paper.

6.      Measuring accounts receivable performance

a)      Day sales outstanding – it measures the number of day sales that remain unpaid at the end of the period.

b)      Accounts receivable turnover ratio – it measures the amount of sales that has been turned into cash in a specified period

c)      Collections effectiveness index – it measures the amount of money still owed by the business at the end of the collection period

7.      Financing accounts receivable

a) Factoring – this is where a thirt party purchases the accounts recievable and is paid back once the debtors pay for their amounts

b) Invoice discounting – this is where a financial institution gives a business money against its invoices

8.   Interest cost =

a)  = 74.4%

b)  = 37.2%

c)  = 24.8%

d)  = 18.6%

e) = 14.8%

The more the number of days of credit, the less the interest cost.

9.      Given, line of credit of $ 200,000

Interest = 11%

Compensating balance = 15% of the total line of credit

Effective interest rate if 50 % was used = EAR= Interest / Proceeds

Proceeds = (Principle* proceeds percentage)  - Interest

Proceeds percentage = 100 – 15 = 85%

 = 170,000

 = 22,000

= 12.9%/2

= 6.4%

b)  

            = 6.6%

c)

            =6.7%