Solution Library

Differences And Similarities In Working Capital Financing And Working Capital Investment

Question

The following financial information relates to XYZ Co.

Income statement extracts

2011

2010

 

RM000

RM000

Revenue

14,525

10,375

Cost of sales

10,458

6,640

 

 

 

Profit before interest and tax

4,067

3,735

Interest

355

292

Profit before tax         

3,712

3,443

Taxation

1,485

1,278

Distributable profit

2,227

2,165

 

Statement of financial position extracts

2011

 

2010

 

 

RM000

RM000

RM000

RM000

Non-current assets

 

15,284

 

14,602

Current assets

 

 

 

 

Inventory        

2,149

 

1,092

 

Trade receivables

3,200

 

1,734

 

 

 

5,349  

 

2,826

Total assets

 

17,428

 

20,633

 

 

 

 

 

Current liabilities

 

 

 

 

Trade payables

2,865

 

1,637

 

Overdraft

1,500

 

250

 

 

 

4,365

 

1,887

Equity

 

 

 

 

Ordinary shares          

8,000

 

8,000

 

Reserves

4,268

 

3,541

 

 

 

12,268

 

11,541

Long-term liabilities

 

 

 

 

7% Bonds

 

4,000

 

4,000

Total liabilities

 

20,633

 

17,428

Average ratios for the last two years for companies with similar business operations to XYZ Co are as follows:

Current ratio 1·7 times

Quick ratio 1·1 times

Inventory days 55 days

Trade receivables days 60 days

Trade payables days 85 days

Sales revenue/net working capital 10 times

Required:

(a) Critically discuss the similarities and differences between working capital policies in the following areas:

(i) Working capital investment;

(ii) Working capital financing.

Summary

The question belongs to Finance and it is about discussing the differences between working capital policies with respect to working capital investment and working capital financing. These questions have been answered in the solution in detail.

Total Word Count 511

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