Working Capital Management: Objectives and Role in Financial

School: Institute of Finance Management, Dar Es Salaam - Course: FINANCE 07303 - Subject: Accounting

AFU 07303 - TUTORIAL QUESTIONS FORBEF, BACC,BSP, BTX,BAIT and BAIT 2 WORKING CAPITAL MANAGEMENT QUESTION ONE Identify the objectives of working capital management and discuss the central role of working capital management in financial management QUESTION TWO BEFBACC has the following forecast figures for its first year of trading: Sales TZS 3,600,000, Purchases expense TZS 3,000,000, Average receivables TZS 306,000, Average inventory TZS 495,000, Average payables TZS 230,000, Average overdraft TZS 500,000, Gross profit margin 25% Industry average data: Inventory days 53, Receivables days 23, Payables days 47, Current ratio 1.43, Assume there are 365 days in the year. REQUIRED: Calculate and comment on BEFBACC's cash operating cycle, current ratio, quick ratio and sales to working capital ratio. QUESTION THREE Which of the following statements concerning working capital management are correct? (1) The twin objectives of working capital management are profitability and liquidity (2) A conservative approach to working capital investment will increase profitability (3) Working capital management is a key factor in a company's long-term success A.1 and 2 onlyB.1 and 3 onlyC.2 and 3 onlyD.1, 2 and 3 QUESTION FOUR a)Differentiate between overtrading and overcapitalization. Discuss the signs of overtrading. b)Discuss the motives for holding cash c)Explain any five methods that a company could use to assess the creditworthiness of a customer or a potential customer.

d)Explain various methods used by companies to ensure customers pay on a timely manner. e)Discuss a few important financial ratios and analysis used in managing receivables. f)Discuss the various methods of financing working capital. QUESTION FIVE The management of XYZ Co has annual credit sales of TZS 20 million and accounts receivable of TZS 4 million. Working capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year. What is the annual finance cost saving if the management reduces the collection period to 60 days? A TZS 85,479 B TZS 394,521 C TZS 78,904 D TZS 68,384 QUESTION SIX The following information has been calculated for A Co: Trade receivables collection period: 52 days Raw material inventory turnover period: 42 days Work in progress inventory turnover period: 30 days Trade payables payment period: 66 days Finished goods inventory turnover period: 45 days What is the length of the working capital cycle? A 103 days B 131 daysC 235 daysD 31 days QUESTION SEVEN The table below gives information extracted from the annual financial statements of Management plc for the past year. Management plc - Extracts from annual accounts Inventories: raw materials TZS 108,000,000 work in progress TZS 75,600,000 finished goods TZS 86,400,000 Purchases of raw materials TZS 518,400,000 Cost of production TZS 675,000,000 Cost of goods sold TZS 756,000,000 Sales TZS 864,000,000