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You are hired to provide comments on the working capital management of David Limited. It...

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Finance

You are hired to provide comments on the working capital management of David Limited. It is given that the inventory of David Limited is $100,000 at the beginning of the year, and it is

$140,000 at the end of the year. The costs of goods sold of the company is 60% of sales revenue, and the company has sales revenue of $3 million. David Limited does not offer any sales and trade discount for the customers, and the company grants a credit period of 30 days to the customers. David limited would enjoy a 2% discount from its supplier if the payment is made within 5 days; otherwise, the full amount must be paid within 30 days of the invoice. The accounts receivable turnover is 10 times, and the average accounts payable is $36,000. The targeted inventory period, the targeted operating cycle, and the targeted cash cycle are at most 30 days, 60 days, and 50 days respectively.

  1. Could David Limited enjoy the 2% discount from its supplier? (3 marks)

  1. Could David Limited meet the targeted cash cycle? (3 marks)

Briefly discuss (with not more than 60 words) whether David Limited could reduce the cash cycle by paying the bills to the suppliers sooner if this action does not affect the average collection period and inventory periods.

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