Accounting Business Reporting for Decision Making

CHAPTER 13 Financing the business 557

SOLUTION TO 13.3

a. and b.

Item 2014 2015 2016 2017 2018

Trade creditors 800 1 000 1 200 1 400 1 600

Credit purchases 4 000 4 400 4 800 5 000 5 200

Creditors turnover (times) 5 4.4 4 3.57 3.25

Creditors turnover (days) 73 82.9 91.25 102.2 112

c. It is obvious from the calculations illustrated above that the average settlement time is decreasing

in number of times per year and increasing in number of days. In 2014, the average time to settle

creditors was 73 days and in 2018 the average time has increased to 112 days. This is clearly not

a satisfactory situation for Goodrem Ltd. Goodrem Ltd needs to examine if the credit terms have

increased over this time (i.e. are the trade creditors being more generous to Goodrem Ltd or is the

increase in days more a case of poor cash management practices and insufficient cash?).

Comprehension questions

13.4 Differentiate between working capital and net working capital. Provide examples of both

current asset and current liability accounts that would be taken into consideration to

determine net working capital for a newsagency. LO1

13.5 Which of the following entities do you think would have the greatest proportion of

working capital held as cash? LO1

a. Local convenience store

b. Wholesaler of computers

c. Farmer selling vegetables at a weekend market.

13.6 Which of the following entities do you think would have the greatest proportion of

working capital held as accounts receivable? LO1

a. Local convenience store

b. Wholesaler of computers

c. Farmer selling vegetables at a weekend market.

13.7 Which of the following entities do you think would have the greatest proportion of

working capital held as inventory? Why? LO1

a. Local convenience store

b. Wholesaler of computers

c. Farmer selling vegetables at a weekend market

13.8 As production manager for a hoodie manufacturing company, how would you react

regarding your inventory levels in the following circumstances? LO4

a. Continual breakdowns in the machine used to weave the fabric for the hoodies

b. Unreliable outsourced final colouring of the hoodies

c. Reduction in interest rates

d. Unreliable supplier of fabric for the hoodies.

13.9 As inventory manager in a retail-chain warehouse, how would you react regarding your

inventory levels in the following circumstances? LO4

a. Sudden volatility in sales

b. Continual short deliveries by suppliers

c. Managerial suggestions to reduce the number of product lines

d. Increase in interest rates.

13.10 If you had just started a business and were in the early development phase, which forms

of short-term credit would you try to maximise? Why? LO5

13.11 What is a novated lease? How is it markedly different from other leases? LO6