Working Capital and Cash Management Exercises

FINANCIAL MANAGEMENT
2nd Semester AY 2023-2024

Working Capital and Cash Management
CASH CONVERSION CYCLE
Problem 1
An entity’s average age of inventory is 60 days, average age of the accounts payable is 30
days, and an average age of accounts receivable is 45 days.
a. What is the entity’s operating cycle?
b. What is the entity’s cash flow cycle?
Problem 2
In its 2023 annual report, ABC Corporation reporting that it had revenues of P18 billion,
cost of goods sold of P16.8 billion, accounts receivable of P2.4 billion, inventory of P2.1 billion
and accounts payable of P1.25 billion. Total purchases for the year was P11.25 billion.
Determine the cash conversion cycle.
Problem 3
The balance sheet of Olive Industries for December 31, 2023 contains the following. The
amounts also pertain to the average for the year.
ASSETS LIABILITIES AND SHAREHOLDERS EQUITY

Cash 10,000 Accounts Payable 56,250
Marketable Securities 80,000 Notes Payable (Short Term) 17,000
Accounts Receivable 60,000 Other Current Liabilities 52,000
Inventories 100,000 Long Term debt 82,000
Plant and Equipment 220,000 Preferred Stock 50,000
Less: Depreciation 64,000 Common Stock 49,000
Net Plant and Equipment 156,000 Paid in Surplus 39,750
Retained Earnings 60,000
Total Assets 406,000 Total L and SHE 406,000
Sales for the year amounted to P720,000. Mark up on cost is 60%.
a. What is the working capital?

b. Determine the cash conversion cycle.
FUNDING REQUIREMENTS AND STRATEGIES
Problem 4
ABC Company has a permanent funding requirement of P135,000 in operating assets

and seasonal funding requirements that vary between P0 and P990,000 and average P101,250.
If ABC can borrow short-term funds at 6.25% and long-term funds at 8%, and if it can
earn 5% on the investment of any surplus balances, what is the total cost of:
a. Aggressive strategy for seasonal funding?
b. Conservative strategy for seasonal funding?
Problem 5

and seasonal funding requirements that very between P0 and P800,000 and average P250,000.
ABC can borrow short-term funds at 6.5% and long-term funds at 9%, and it can earn 5% on the
investment of any surplus balances.
a. What is the total cost of an aggressive strategy for seasonal funding?

b. What is the total cost of conservative strategy for seasonal funding?
Problem 6

and seasonal funding requirements that vary up to P600,000 and average P120,000. ABC can
borrow short-term funds at 6% and long-term funds at 8%, and it can earn 5% on the
investment of any surplus balances.
Which funding strategy would be less costly? What is the net advantage?
MANAGEMENT TECHNIQUES IN CONTROLLING CASH FLOWS
Problem 7
ABC obtains average cash receipts of P200,000 per day. Normally, it usually takes 5 days
from the time the check is mailed to its availability to use. How much cash is tied up?
Problem 8
It takes ABC about 7 days to receive and deposit collections from customers. Therefore,
a lockbox system is being considered. The banker explains that with the system in place, the
expected float time will be reduced to 5 days. The maximum monthly charge the company
should pay for the lockbox arrangement is P5,750.
a. Should ABC avail of the service offered by the bank?

b. How much is the advantage or disadvantage of the lockbox system, considering the
average daily collections of P500,000 and the rate of return is 12%?
Problem 9
ABC has an agreement with Bank A to collect P5,000,000 a day in exchange for a
compensating balance of P1,500,000. The firm, with a significant increase in its customer in the
area, is thinking of cancelling the agreement and dividing the service provided by Bank A with
Bank B. With this plan, Bank A will handle the collection of P3,000,000 with a compensating
balance of P1,200,000. On the other hand, Bank B will handle the other P2,000,000 collection in
exchange for a compensating balance of P1,000,000. With the planned arrangement with the
two banks to perform the collection, the firm is expecting to reduce the collection period by one
day. The firm’s rate of return is 8%.
Should ABC pursue the division of service between Bank A and Bank B?
Exercises:
1. CGEM Corporation has an agreement with Security bank Corp (SBC) to collect
P3,000,000 a day in exchange for a compensating balance of P500,000.
The firm, with a significant increase in its customer in the area, is thinking of cancelling
the agreement and dividing the service provided by SBC with China Bank, Inc. (CBI).
With this plan, SBC will handle the collection of P2,000,000 with a compensating balance
of P800,000. On the other hand, CBI bank will handle the other P1,000,000 collection in
exchange for a compensating balance of P400,000. With the planned arrangement with
the two banks to perform the collection, the firm is expecting to reduce the collection
period by one day. The firm’s rate of return is 7%.
What is the amount of incremental income or loss if CGEM will pursue the division of
service between SBC and CBI?
2. It takes ABC several days to receive and deposit collections from customers to its three
banks. Therefore, lockbox system is being considered. The bankers explain that with the
system in place, the expected float time will be reduced. The followings shows the
packages offered by the banks:
Banks China Land Metro
Average daily collections P500,000 420,000 350,000
Current float 7 days 8 days 9 days
Expected float if lockbox is availed 5 days 6 days 7 days
Rate of return 10% 12% 12%
Cost of lockbox system P8,000 P24,500 P48,000
monthly Quarterly Semi-
annually
a. How much is the advantage (disadvantage) of the lockbox system offered by China?
b. How much is the advantage or disadvantage of the lockbox system offered by Land?
c. How much is the advantage or disadvantage of the lockbox system offered by Metro?

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FINANCIAL MANAGEMENT

2nd Semester AY 2023-2024

CASH CONVERSION CYCLE

Determine the cash conversion cycle.

ASSETS LIABILITIES AND SHAREHOLDERS EQUITY

Total Assets 406,000 Total L and SHE 406,000

Sales for the year amounted to P720,000. Mark up on cost is 60%.

a. What is the working capital?

FUNDING REQUIREMENTS AND STRATEGIES

ABC Company has a permanent funding requirement of P135,000 in operating assets

ABC Company has a permanent funding requirement of P300,000 in operating assets

a. What is the total cost of an aggressive strategy for seasonal funding?

ABC Company has a permanent funding requirement of P400,000 in operating assets

MANAGEMENT TECHNIQUES IN CONTROLLING CASH FLOWS

a. Should ABC avail of the service offered by the bank?

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