- 20 Marks
FM – L2 – Q103 – Working capital management
Calculate the working capital cycle length for Entity N over three years using provided financial data.
Question
The working capital (or cash operating) cycle of a business is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.
The table below gives information extracted from the annual accounts of Entity N for the past three years.
Entity N – Extracts from annual accounts
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Inventory: | |||
| Raw materials | 108,000 | 145,800 | 180,000 |
| Work in progress | 75,600 | 97,200 | 93,360 |
| Finished goods | 86,400 | 129,600 | 142,875 |
| Purchases | 518,400 | 702,000 | 720,000 |
| Cost of goods sold | 756,000 | 972,000 | 1,098,360 |
| Sales | 864,000 | 1,080,000 | 1,188,000 |
| Trade receivables | 172,800 | 259,200 | 297,000 |
| Trade payables | 86,400 | 105,300 | 126,000 |
Required
(a) Calculate the length of the working capital cycle (assuming 365 days in the year).
(b) List the actions that the management of Entity N might take to reduce the length of the cycle.
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