Problem:
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 of problem:
This question belongs basically to Finance as well as it is about discussing the differences between working capital policies with respect to working capital investment as well as working capital financing. These questions have been answered in the solution comprehensively.