Financial Analysis for Managers: Investing the Proceeds in Inventory - Case Study Example

Financial Analysis for Managers II Question a. Paying out a $2 million cash dividend The entry will be passed as follows. Dividend-paid 2,000,000 Cash/bank 2,000,000I. Cash: It will reduce the cash available by $2 million. II. Net working capital: It will also decrease as the cash balance is being reduced. b. A customer paying a $2,500 bill resulting from a previous sale.The entry will be passed as follows. Cash 2,500 Accounts payable 2,500I. Cash: This will increase the cash reserves as the company is being repaid by a customer who had been issued some goods or services as part of the credit sales. II. Net working capital: This will have no effect on the net working capital because both cash and accounts payable cross out since cash is debited and A/P is credited. c. Paying $5,000 previously owed to one of its suppliers.

The entry will be passed as follows.Suppliers/creditors 5,000 Cash 5,000I. Cash: Since the company is paying-off its suppliers therefore the cash will be reduced by 5000.II. Net working capital: This also has no effect because both current asset and liability item are decreasing by the same amount.d. Borrowing $1 million long-term and investing the proceeds in inventory.The entries will be passed as follows. Cash 1,000,000 Long-term loan 1,000,000 Inventory 1,000,000 Cash 1,000,000I.

Cash: Borrowing a loan does increase the cash and can either be invested in capital goods as well as in inventory. Here in this case since it has been invested in inventory therefore the cash would virtually have no effect. The cash account be increased when the loan is received but then it be credited back to its previous balance by buying out inventory.II. Net working capital: Though this had no effect on the cash but it will increase the net working capital because the long-term liability was used to buy inventory which is a current asset. e. Borrowing $1 million short-term and investing the proceeds in inventory.I. Cash: This has no effect on the cash balance.II. Net working capital: This is increasing both an asset and a liability and therefore it will have no effect on the net working capital.f. Selling $5 million of marketable securities for cashThe entry will be passed as follows.

Cash 5,000,000 Marketable securities 5,000,000I. Cash: Cash will increase by $5milllion. The entry will be.II. Net working capital: it won’t affect the net working capital because both items are current assets.Question 2Before going for the new computer system, we have to analyze a lot of financial aspects of the option. First of all we have to see that what would be the required investment in total to install the new computer system. This includes both hardware and software cost.

The next thing we have to analyze is that how much we would gain in cost saving in terms of holding cost of inventory.The new system might initially be a significant cash outflow and would decrease the working capital. On the contrary, we can also opt for some long-term financing. this will keep a moderate cash outflow in terms of installments. Installing this computer system is aimed to have the lowest possible inventories. This is also affected by the freight charges and reliability of the supplier to supply the goods when needed at desired quantities at lowest possible rates.

If successful the company will enjoy a great number of cash conversion cycles (assuming the demand is there) which will increase the profitability of the company by investing in the least possible inventory and sell it for revenue.ReferenceSangster, Alan & Wood, Frank (1999), “Business Accounting 2”, Eighth Edition, Prentice Hall: Great Britain