Working Capital GTG ST

[Acid]

Hi

In GTG Studytext page C2.4 Diagram 2 it showsthe receipt of cah from customer takes 3.5 month while on page C2.3 example it says that the credit period given to customers is only 1 month....

Can you explain me this difference?

Thanks

Acid

[Acid]

Hi

I want to clear my understanding of Cash operating cycle , taking the example on page c2.3 .

I means that we recieve the cash 1.5 months after we the supplier , isnt?

2. Page C2.7 in TIPS it says that that wherever given we should use averages instead of year end figures , so immediately in Test urself 2 why didnt we take av for inventory turnover when the 2 figures are given in balance sheet , enabling us to calculate the average?
Thanks

Acid

[Asif]

Cash Operating Cycle is the averge time taken from expending the cash to the production of goods and receiving cash.
Usually in a non manufacturing firm :

+average days required for production
+average inventory turnover period
+average receiveable payment\collection period
- average payable period\payable payment period


disadvantage - advantage = cash operating cycle :D
The longer this period is, the worse it is

average days required for production
average inventory turnover period
average receiveable payment\collection period

Advantage :
The longer it is , the better it is coz you dont want to pay him

Payable payment period

[Tia]

hi Acid,

The Diagram on C2.4 considers the cumulative time involved in the operating cycle. The one month you are referring to is claculated from thr time the sales are made (normally, you would calculate the credit period to your customers starting from only after you make the sale).

Let me know if you need further clarification.

Pritika.

[Tia]

Hi Acid

As for TY 2, idealy you should be using an average as mentioned in the TIPS but, inorder to do that you should also have data for either year 2004 or 2007 so that you can compare the figures and figure out a trend to arrrive at a conclusion. If you used averages for these two years, what would you compare them with?

Again reply if you need further clarification.

Pritika.