Page 14 - CIMA OCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – OPERATIONAL CASE STUDY

CHAPTER TEN

EXERCISE ONE (WORKING CAPITAL)

From: Finance Officer.
To: Tony Trigg, Managing Director
Subject: Re: New Product development

Hi,
Operating cycle review

Differences between Parkes’ parks and Trigg Adventure which may contribute to differences I
the operating cycle include the following:

1 – The data provided for each company is based upon its’ year-end reporting date, which differ.
Given the potentially seasonal nature of the products manufactured and sold, it may be that
Parkes’ Parks components which comprise the operating cycle figures relatively high in
comparison with other times during the accounting year as 30 June will be in the middle of the
busy period. In contrast, the operating cycle components for Trigg Adventure are based upon its
reporting date of 31 December when it may be expected to be less busy. Consequently, Trigg’s
receivables days figure may be higher at the year-end than during the summer months. On the
other hand we will be building up inventory of finished goods during the winter in order to meet
peak demand in the summer, so inventory days shown may be higher than is typical.

Note that, even if the components which make up the operating cycle change, it may have a
negligible net effect upon the operating cycle as a whole.

2 – The customer base of the two companies is different. Parkes’ Parks sell to only to the
commercial market. The calculation of receivables’ days, if based upon total sales for each
company, will be distorted in the case of Trigg Adventure. This is because sales to the domestic
market sales are paid for by debit or credit card and they account for approximately 70% of Trigg
Adventures’ sales. Cash from domestic sales is therefore collected relatively quickly. Rather than
having to provide credit terms, and then potentially have to follow up on late payment. This may
account for the fact that the receivables days’ collection period of 24 days for Trigg Adventure is
significantly lower than 45 days for Parkes’ Parks.
There may also be differences in the credit terms offered by the two companies to their
commercial customers. For example, Trigg Adventure allow up to 50 days credit to local
governments. In comparison, Parkes’ Parks receivables days ‘ is 45 days, but this will be an
average which may hide a range of credit periods granted to different customers.
3 – The trade payables’ credit period is 60 days for Parkes’ Parks, whereas it is 37 days for Trigg
Adventure. Although there is no information relating to the relative size of the two companies,
(e.g. revenue earned, total assets etc) it would appear that Parkes’ Parks has been able to
negotiate extended credit terms with its suppliers. However, it could also be an indication that, if
the credit period agreed with suppliers is, say, 30 days, Parkes’ Parks may be having difficulty in
paying amounts due within the agreed credit period. Another relevant factor is whether Trigg
Adventures pays suppliers promptly in order to take advantage of discount terms, although
there is no separate disclosure of discount received in Trigg Adventures’ statement of profit or
loss for the year ended 31 December 2018.
4 – The inventory holding period of Parkes’ Parks is slightly lower at 80 days in comparison with
90 days for Trigg Adventure. This could be due, in part, to better inventory management by
Parkes’ Parks and the seasonal factor outlined above..

70 KAPLAN PUBLISHING