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Question 2c

The current assets and current liabilities of CSZ Co at the end of March 2014 are as follows:

$000 $000
Inventory 5,700
Trade recievables 6,575 12,275
Trade payables 2,137
Overdraft 4,682 6,819
Net current assets 5,456

For the year to end of March 2014, CSZ Co had domestic and foreign sales of $40 million, all on credit, while cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.

For the year to end of March 2015, CSZ Co has forecast that credit sales will remain at $40 million while cost of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the company’s overdraft.

CSZ Co also plans to achieve the following target working capital ratio values for the year to the end of March 2015:

Inventory days: 60 days
Trade receivables: 75 days
Trade payables: 5 days
Current Ratio: 1.4 days

Required:

(c)Analyse and compare the current asset and current liability positions for March 2014 and March 2015, and discuss how the working capital financing policy of CSZ Co would have changed.(8 marks)