Question One

Peter is a manager employed by Hempworth Trading Pty Ltd. He is worried that the company's cash position is not as strong as it should be as whenever he pays the trade accounts payables the business is short of cash.

He has asked you to look at how long it takes to collect the accounts receivables and what the size of the average accounts receivables would be if the company was able improve the collection period so that it was less than the payment period for payables of 30 days. He thought that a collection period of 28 days would be reasonable. All sales are on credit terms.

He also believes that the inventory stays too long in the company's warehouse and that the cash flows would be improved if inventory could be turned around in a shorter period thereby lessening the stockholding costs and improving cash flow. He thinks that a target turnaround of 30 days should be achievable.

The following data was extracted from the financial statements:

Required

Hempworth Trading Pty Ltd

Profit and Loss Account (Extract)

for the year ended 30th June 2023

Net Sales $1,250,000

Cost of sales 765,712

Hempworth Trading Pty Ltd

Statement of Financial Position (Extract)

As at 30th June

2023 2022

Current assets

Accounts receivable $172,725 $128,645

Inventory 100,997 75,222

Write a business letter to Peter advising him about:

a) The current collection period for accounts receivables and what the projected average accounts receivables would be if the collection period was reduced to 28 days.

b) The benefits and risks associated with a reduced accounts receivable collection period.

c) Themethodsthatthecreditcontroldepartmentcanemploytoimprovethecollectionof accounts receivables.

d) The time that the inventory currently stays in the warehouse and what the average inventory value would be if Peter's target of 30 days was met.

e) The benefits and risks associated with a reduced inventory holding period.