Question 3a
Examiners Report

The requirement here was for candidates to calculate the change in the operating cycle, the effect on the current ratio and the finance cost saving of a change in working capital policy, commenting on their findings. Most candidates did quite well on this question, indicating a good understanding of working capital ratios.

Where candidates did not do well, this was often because of errors in calculating working capital ratios, such as trade receivables days or trade payable days. Because the question said that the change in policy would not affect net working capital, which is the difference between current assets and current liabilities, the value of the overdraft after the change in policy was the value that kept net working capital constant at $300,800.

A number of students struggled with this point and kept the overdraft at the level it had before the change in policy, so that net working capital changed. This naturally affected their calculated current ratio value.

The finance cost saving could be calculated from the change in the level of the overdraft, using the short-term borrowing rate.

Many students commented at length on the changes in trade receivables days, inventory days and trade payables days, but the question asked for the change in the operating cycle to be calculated and commented on, it did not ask for comment on the changes in the elements of the operating cycle.

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