Page 4 of 11 Question 3
X Ltd is a holding company. Senior management wishes to compare the performance of
the two subsidiaries of M Lid: Y Ltd ("Y) and Z Ltd (Z"), which operate in a similar industry.
Extracts from the financial statements of Y and Z for the year ended 31 December 2019
are as follows:
Revenue
767.000
593,000
Cost of sales
568,000
377.000
Current assets
Inventory
122.000
97,000
Trade receivables
124.000
136.000
Bank
6,000
8,000
Current liabilities
Trade payables
107.000
130,000
Note: all revenues are credit sales.
Required:
As financial controller, prepare a memorandum for the holding company's managing
director, which should include the following:
(a)
Estimate the cash conversion cycle for both Y and Z using the details provided
above and compare the results. Assume a 360-day year.
(10 marks)
(b)
a list of key recommendations for improvements in the working capital
management of each company based on your results from part (a). (4 marks)
(c)
a discussion of the objectives of working capital management and two sources of
short-term financing that would be suitable for the financing of working capital.
(6 marks)
(d)
a discussion of key steps the company should follow for the management of trade
receivables.
(5 marks)
[Total: 25 marks]
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