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Security Solutions: Questions
Finance & Accounting
Pages 4 (1004 words)
SECURITY SOLUTIONS: QUESTIONS Name Date 1. Compare the trade payables settlement period for Security Solutions’ two trading years. Describe and comment on the change. Answer: Trade Payable period has been increased 54 to 63 days. The company can now delay paying to its creditors by 9 more days.
2. Compare the trade payables settlement period with the industry average. Explain the advantages and disadvantages to Security Solutions Ltd of maintaining its trade payables at the current level? Answer: The industry payable turnover is only 30 days. This means that the company is taking advantage by paying its creditors late. Although it is foregoing 2.5% discount, but it can make use of the money that they have in hand for almost 30 days (as they pay their creditors in almost 60 days). This money can be used to buy government securities or short term investments that would give a return of greater than 2.5% and hence the company is currently doing a great job. The advantages of this are improvement in cash conversion cycles, investment opportunity and it can use the cash for profitable purposes. Disadvantage is that it may lose its reputation in the market and it has to forego 2.5% discount. However, advantages of the policy outweigh the disadvantages and the company should continue with the current policy. 3. If Security Solutions Ltd had, in the year ending January 31 2011, reduced the trade payables average settlement period to 30 days and benefitted from the 2% discount on purchases: 15 marks a. Calculate the change to its OCC. [4 marks] OCC under present condition: 67+ 64 – 63 = 69 Days OCC after new policy = 67 + 64 -30 = 102 days b. Show how it affects the company’s liquidity position. ...
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