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FLG co. has annual credit sales of $4.2 million and cost of sales of $1.89 million. Current assets consist of inventory and accounts receivable. Current liabilities consist of accounts payable and an overdraft with an average interest rate of 7% per year. The company gives two months credit to its customers and is allowed, on average, one month’s credit by trade suppliers. It has an operating cycle of three months.
Other relevant info:
Current ratio of FLG 1.4
Cost of long term finance of FLGQuestion: Calculate the size of the overdraft of FLG, the net working capital of the company and the total cost of financing its current assets.
I havn’t got the question properly.
Have you watched all of the lectures on working capital?
You can calculate average receivables ( 2/12 x $4.2M)
You can calculate average payables (1/12 x $1.89M)You know the operating cycle is 3 months and therefore the inventory period is 2 months, so you can calculate average inventory (2/12 x $1.89M).
Once you have these, you are able to calculate what the overdraft is, because total current assets / total current liabilities = 1.4
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