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Homework answers / question archive / For questions 1 to 5: A commercial company initially sells €600 a year
For questions 1 to 5: A commercial company initially sells €600 a year. Sales are uniform. COGS = 70% of sales.
Question1) If receivables = €200, what are the days of collection?
90 days
30 days
60 days
120 days
Question 2) If inventory = €105, what are the days of inventory?
90 days
120 days
180 days
60 days
Question 3) The days of collection change to 90 days. You will therefore have in receivables:
€300
€150
€250
€100
Question 4) If sales now grow 20% and days of collection are 120 like in question 1, then:
The company is doing better, and receivables will actually decrease 20%.
Receivables also grow 20%, and thus will be €280.
Receivables will not change; they will stay at €200.
Receivables also grow 20% and thus will be €240.
Question 5) Imagine now that sales are €720 like in the previous question, days of collection are 120 and days of inventory are 90. The company manages a just-in-time delivery that reduces dramatically days of inventory to 10. At the same time, the marketing department, to win new customers and reward existing customers, increases the days of collection to 200. Therefore:
The need of financing increases.
We will need to use less credit, because the need of financing decreases.
The needs of financing do not change, given that the decrease of inventory days (80) are compensated with the increase of collection days (80).
This fact has nothing to do with needs to finance operations.
Answers:
Question 1
Days of collection = receivables * 360 / sales = 200*360/600 = 120 Days
Question 2
Days of inventory = inventory * 360 / COGS = 105 * 360/420 = 90 days
Question 3
If days of collection = 90 days,
receivables = days of collection * sales / 360 = 90*600/360 = Euro150
Question 4
If sales now grow 20% and days of collection are 120 like in question 1, then:
Receivables = days of collection * sales / 360 = 120 * 600 * 120% / 360 = Euro240
Therefore, Receivables also grow 20% and thus will be €240.
Question 5
Imagine now that sales are €720 like in the previous question, days of collection are 120 and days of inventory are 90. The company manages a just-in-time delivery that reduces dramatically days of inventory to 10. At the same time, the marketing department, to win new customers and reward existing customers, increases the days of collection to 200. Therefore:
Receivables = days of collection * sales / 360 = 120 * 720 / 360 = Euro240
Inventory = days of inventory * COGS / 360 = 90 * 720 * 70%/360 = Euro 126
Total = 240 + 126 = Euro366
Revised scenario
Receivables = days of collection * sales / 360 = 200 * 720 / 360 = Euro400
Inventory = days of inventory * COGS / 360 = 10 * 720*70% / 360 = Euro14
Total = 400 + 14 = Euro414
Increase in assets = 414 - 366 = Euro48
Increase in asset means increase in the need of financing.
Therefore the answer is The need of financing increases.
