This 13 page paper examines a fictitious case study supplied by the student, showing how to calculate different ratios to assess the use of working capital within the company. This includes the current and quick ratios, inventory turnover and period, the operating cycle and cash cycle and total working capital. Each is explained and show to the student so they can repeat the calculations. Following this ways of reducing to level or cost or working capital are considered. The bibliography cites 3 sources.
Name of Research Paper File: TS14_TEworkcap.rtf
Unformatted Sample Text from the Research Paper:
at the balance sheet there is 918,000 in cash, however, there may be concerns when it is considered that the accounts payable are 1,680,000, much greater than the cash available.
However, the calculation is not this simple. We can look at this using the current and the quick ratio. The current ratio is calculated by taking the current assets
and dividing them by the current debts. The result is a ratio that indicates how many times the current assets will cover the current liabilities. For example if a
company has current assets of 2 million and current liabilities of 1 million then the ratio would be 2, indicating the current assets can pay the current liabilities twice over.
It is often cited that this ratio should be at least 1.5 to allow for some current assets that may not be liquidated immediately or for those such as
debtors that may not be realised. However, for many industries today, such as the high tech industries or the service sector, where there are few current assets, this may be
seen as requiring a lower ratio. For Outboard Motors the total current assets are 5,107,880 and the total current liabilities are 1,680,00, this gives us a current ratio of 30.4,
which is some analyses may appear high. However, when we look at this there is a high level of stock, and we know from the figures that the business is
seasonal as such some of the asset, such as some of the stock, may not have a value that is useful against the current liabilities. To get a clearer
idea of the position, especially in a company where there is a high stock figure we can use the quick ratio is also known as the acid test. This is