Answers to Chapter Review and Self Test Problems

19.1 We first need the turnover ratios. Note that we use the average values for all balance sheet items and that we base the inventory and payables turnover measures on cost of goods sold.

Inventory turnover = $11,375/[(1,273 + 1,401)/2] Receivables turnover = $14,750/[(3,782 + 3,368)/2] Payables turnover = $11,375/[(1,795 + 2,025)/2]

We can now calculate the various periods:

Inventory period = 365 days/8.51 times = 42.89 days Receivables period = 365 days/4.13 times = 88.38 days Payables period = 365 days/5.96 times = 61.24 days

8.51 times 4.13 times 5.96 times

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

19. Short-Term Finance and Planning

© The McGraw-Hill Companies, 2002

CHAPTER 19 Short-Term Finance and Planning

So the time it takes to acquire inventory and sell it is about 43 days. Collection takes another 88 days, and the operating cycle is thus 43 + 88 = 131 days. The cash cycle is this 131 days less the payables period, 131 - 61 = 70 days.

19.2 Because Greenwell has a 60-day collection period, only those sales made in the first 30 days of the quarter will be collected in the same quarter. Total cash collections in the first quarter will thus equal 30/90 = >3 of sales plus beginning receivables, or % X $150 + 240 = $290. Ending receivables for the first quarter (and the second-quarter beginning receivables) are the other % of sales, or % X $150 = $100. The remaining calculations are straightforward, and the completed budget follows.

GREENWELL CORPORATION Cash Budget (in millions)

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