Modern Kitchens specializes on sell prefabricated kitchens. The company has stores in all major capital cities...

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Modern Kitchens specializes on sell prefabricated kitchens.The company has stores in all major capital cities throughoutAustralia. It’s been established since 2001 and has seen tremendousgrowth but more recently has seen several overseas competitorsenter the Australian market resulting in an increase incompetition. This increased competition has placed significantpressure on containing costs and drawn management’s attention to areview of working capital practices. Detailed below are relevantfigures and ratios to assist you in evaluating Modern Kitchen’sworking capital management.
Working Capital Ratios 2016 2017 2018 2019
Accounts Receivable Days 14.0 days 18.1 days 23.1 days 31.9days
Inventory Days 16.0 days 19.1 days 21.9 days 25.0 days
Accounts Payable Days 14.1 days 21. days 29.0 days 37.0days
Note: Ratios are based on assuming end year figures are theaverage throughout the majority of the year
Extracts from Financial Statements
Cash on hand 0.20 mill 0.15 mill .01 mill (.003 mill)
Sales – all on credit 8.1 mill 6.9 mill 8.0 mill 9.0mill
Accounts Receivable Balance 0.3069 mill 0.3453 mill 0.5044mill 0.7894 mill
Inventory 0.1754 mill 0.2186 mill 0.2712 mill 0.3219mill
Cost of Goods Sold 4.0 mill 4.2 mill 4.5 mill 4.7 mill
Accounts Payable 0.1534 mill 0.2417 mill 0.3574 mill0.4762mill
Budgeted Figures
Cash on hand 0.3 mill 0.3 mill 0.31 mill 0.32 mill
Accounts Receivable Balance 0.30 mill 0.31 mill 0.37 mill 0.38mill
Inventory Balance 0.16 mill 0.17 mill 0.20 mill 0.21mill
Accounts Payable 0.16 mill 0.17 mill .19 mill 0.20 mill
Accounts Receivable Terms 14 days 14 days 14 days 14days
Accounts Payable Terms 30 days 30 days 30 days 30 days
Industry Averages
Accounts Receivable Days 14 days 14 days 15 days 16 days
Inventory Days 15 days 16 days 16 days 15 days
Accounts Payable Days 30 days 28 days 25 days 20 days
REQUIRED:
Calculate (show full workings to your answer):
(i) the dollar value of actual net working capitaleach year from 2016 to 2019 for Modern Kitchens.
(ii) the duration of the operating cash cycle each year from2016 to 2019 for Modern Kitchens.
(iii) interpret the meaning of each of the figures calculatedabove (40-word limit)
(a) Review Modern Kitchens’s working capital managementperformance utilizing calculations in (a) above and informationprovided such as trends / benchmark figures / industry averages andbudgets (300-word limit).

(b) Once you have analyzed their performance,provide some strategies and recommendations to assist in improvingany weaknesses in working capital management referring to themanagement of components of working capital including cash,inventory, accounts receivable and accounts payable. As part ofyour recommendations identify the associated potential benefits andcosts of each recommendation. (400-word limit)

Answer & Explanation Solved by verified expert

3.7 Ratings (596 Votes)

Part i Please see the table below Please be guided by the second column to understand the mathematics You can also understand the mathematics making use of sign appearing in the first column The last row highlighted in yellow is your answer Figures in parenthesis mean negative values All financials are in mn Year Linkage 2016 2017 2018 2019 Cash A 02000 01500 00100 00030 Accounts Receivable B 03069 03453 05044 07894 Inventory C 01754 02186 02712 03219 Accounts Payable D 01534 02417 03574 04762 Net working capital E A B C D 05289 04722 04282 06321 Part ii Year Linkage 2016 2017 2018 2019 Accounts Receivable Days P 1400 1810 2310 3190 Inventory Days Q 1600 1910 2190 2500 Accounts Payable Days R 1410 2100 2900 3700 The duration of the operating cash days S P Q R 1590 1620 1600 1990 Part iii Net working capital is the capital stuck in the day to day operations of the firm Its a short term requirement of funds to sustain the operations But since operating cycles See Answer

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Transcribed Image Text

Modern Kitchens specializes on sell prefabricated kitchens.The company has stores in all major capital cities throughoutAustralia. It’s been established since 2001 and has seen tremendousgrowth but more recently has seen several overseas competitorsenter the Australian market resulting in an increase incompetition. This increased competition has placed significantpressure on containing costs and drawn management’s attention to areview of working capital practices. Detailed below are relevantfigures and ratios to assist you in evaluating Modern Kitchen’sworking capital management.Working Capital Ratios 2016 2017 2018 2019Accounts Receivable Days 14.0 days 18.1 days 23.1 days 31.9daysInventory Days 16.0 days 19.1 days 21.9 days 25.0 daysAccounts Payable Days 14.1 days 21. days 29.0 days 37.0daysNote: Ratios are based on assuming end year figures are theaverage throughout the majority of the yearExtracts from Financial StatementsCash on hand 0.20 mill 0.15 mill .01 mill (.003 mill)Sales – all on credit 8.1 mill 6.9 mill 8.0 mill 9.0millAccounts Receivable Balance 0.3069 mill 0.3453 mill 0.5044mill 0.7894 millInventory 0.1754 mill 0.2186 mill 0.2712 mill 0.3219millCost of Goods Sold 4.0 mill 4.2 mill 4.5 mill 4.7 millAccounts Payable 0.1534 mill 0.2417 mill 0.3574 mill0.4762millBudgeted FiguresCash on hand 0.3 mill 0.3 mill 0.31 mill 0.32 millAccounts Receivable Balance 0.30 mill 0.31 mill 0.37 mill 0.38millInventory Balance 0.16 mill 0.17 mill 0.20 mill 0.21millAccounts Payable 0.16 mill 0.17 mill .19 mill 0.20 millAccounts Receivable Terms 14 days 14 days 14 days 14daysAccounts Payable Terms 30 days 30 days 30 days 30 daysIndustry AveragesAccounts Receivable Days 14 days 14 days 15 days 16 daysInventory Days 15 days 16 days 16 days 15 daysAccounts Payable Days 30 days 28 days 25 days 20 daysREQUIRED:Calculate (show full workings to your answer):(i) the dollar value of actual net working capitaleach year from 2016 to 2019 for Modern Kitchens.(ii) the duration of the operating cash cycle each year from2016 to 2019 for Modern Kitchens.(iii) interpret the meaning of each of the figures calculatedabove (40-word limit)(a) Review Modern Kitchens’s working capital managementperformance utilizing calculations in (a) above and informationprovided such as trends / benchmark figures / industry averages andbudgets (300-word limit).(b) Once you have analyzed their performance,provide some strategies and recommendations to assist in improvingany weaknesses in working capital management referring to themanagement of components of working capital including cash,inventory, accounts receivable and accounts payable. As part ofyour recommendations identify the associated potential benefits andcosts of each recommendation. (400-word limit)