Unit 14 Assessment — Working Capital Management

🔄 Cash Conversion Cycle

📦 Inventory & Receivables

💳 Payables & Short-Term Credit

⚖️ Liquidity Ratios & NWC

Cash Conversion Cycle

CCC FormulaCCC = DIO + DSO − DPO

Days Inventory Outstanding (DIO)DIO = Inventory ÷ (COGS ÷ 365)

Days Sales Outstanding (DSO)DSO = Accounts Receivable ÷ (Sales ÷ 365)

Days Payable Outstanding (DPO)DPO = Accounts Payable ÷ (COGS ÷ 365)

GoalMinimize CCC → collect faster, pay slower, turn inventory faster

Inventory & Receivables

Inventory TurnoverCOGS ÷ Average Inventory

Receivables TurnoverSales ÷ Average Accounts Receivable

EOQ (Economic Order Qty)EOQ = √(2 × Annual Demand × Order Cost ÷ Carrying Cost)

Credit Policy Components5 C's: Character, Capacity, Capital, Collateral, Conditions

Aging ScheduleGroups receivables by age — identifies collection problems

Payables & Short-Term Credit

Cost of Trade CreditNominal rate = (Discount ÷ (1−Discount)) × (365 ÷ Credit Days beyond discount)

Example: 2/10 net 302% discount if paid in 10 days; else full amount due in 30 days

APR of forgoing discount(2/98) × (365/20) = 0.0204 × 18.25 = 37.2%

Line of CreditRevolving short-term bank credit — covers seasonal cash needs

Compensating BalanceRequired minimum deposit; raises effective cost of credit line

Liquidity & Net Working Capital

Net Working Capital (NWC)Current Assets − Current Liabilities

Current RatioCurrent Assets ÷ Current Liabilities

Quick (Acid-Test) Ratio(Current Assets − Inventory) ÷ Current Liabilities

Operating CycleDIO + DSO (time from buying inventory to collecting cash)

Aggressive vs. ConservativeAggressive: more ST debt, less NWC, higher risk/return · Conservative: more LT debt, higher NWC, lower risk

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out of 100 points

—

Section 1

—/40

Multiple Choice

Section 2

—/20

True / False

Section 3

—/20

Short Answer

Section 4

—/20

Extended Response

⚠ Sections 3 & 4 are teacher-graded. Use the rubric selectors below to finalize the score.

Multiple Choice

Select the best answer · CCC, DSO, DIO, DPO, trade credit cost & liquidity calculations

2 pts each · 40 pts

Click the best answer. Use the formula reference panel and CCC component strip above. Each question is worth 2 points.

True or False

Click TRUE or FALSE for each statement

2 pts each · 20 pts

Select TRUE or FALSE for each statement. Each is worth 2 points.

Short Answer

Show all calculations + explain in 2–4 sentences · Teacher-graded

5 pts each · 20 pts

Answer in 2–4 complete sentences. Show every calculation step clearly. Rubric selectors appear after grading.

Extended Response — Bessemer Building Supply: Working Capital Efficiency Analysis

Full CCC · Trade credit · Policy recommendation · Teacher-graded

20 pts

Read the scenario carefully. Write a well-organized analytical memo of at least 8 sentences. Show all calculations with labeled steps. Use and underline at least four unit vocabulary terms.

📋 Scenario — Bessemer Building Supply Co.: Improving Cash Flow & Working Capital Efficiency

Bessemer Building Supply Co. (BBS) is a Black-owned construction materials distributor serving contractors across Jefferson County. The finance manager has asked you to analyze BBS's cash conversion cycle, evaluate its short-term financing options, and recommend strategies to free up cash tied up in operations.

Income Statement Data

Annual Sales: $3,650,000
COGS: $2,920,000
(Use 365-day year)

Balance Sheet Data

Accounts Receivable: $300,000
Inventory: $400,000
Accounts Payable: $160,000

Supplier Credit Terms

BBS's main supplier offers terms: 2/10 net 40 · BBS currently pays on day 40 (forgoing the discount)

Bank Credit Line

Available: $200,000 line of credit at 9% annual rate · Requires 10% compensating balance

35 Write your full working capital analysis memo covering all four parts: (a) Calculate BBS's DIO, DSO, DPO, and the full Cash Conversion Cycle — show each formula and numerical result; interpret what the CCC tells you about how many days BBS's cash is tied up in operations; (b) Calculate the annualized cost of the trade credit discount BBS is forgoing by not paying within 10 days (terms: 2/10 net 40) — show the full formula; then determine whether BBS should take the discount and pay early using the bank line of credit at 9%, or continue forgoing the discount; (c) Calculate the effective annual cost of the bank credit line, accounting for the 10% compensating balance requirement — show your work (assume BBS borrows the full $200,000 but only $180,000 is usable); (d) Recommend TWO specific operational strategies BBS could use to shorten its Cash Conversion Cycle — one targeting receivables and one targeting inventory — and explain in 2–3 sentences why a shorter CCC directly benefits a small community business's financial health. Use at least four underlined vocabulary terms.

📋 Teacher Scoring Rubric

Criterion	Excellent (Full)	Proficient (Partial)	Developing (Minimal)	Score
Part (a) — Full CCC Calculation DIO = $400K÷($2,920K÷365) = $400K÷$8K = 50 days · DSO = $300K÷($3,650K÷365) = $300K÷$10K = 30 days · DPO = $160K÷($2,920K÷365) = $160K÷$8K = 20 days · CCC = 50+30−20 = 60 days	All four values correct with formulas shown: DIO=50, DSO=30, DPO=20, CCC=60 days; CCC interpreted as 60 days of cash tied up	Three of four correct; one arithmetic error; CCC formula applied	Fewer than three correct; no interpretation of CCC	/6
Part (b) — Trade Credit Cost & Decision Cost = (2/98) × (365/30) = 0.02041 × 12.167 = 24.8% · 24.8% > 9% bank rate → BBS should borrow from bank and take the discount — cheaper financing	Trade credit APR ≈ 24.8% correctly calculated; correctly concludes bank line at 9% is cheaper → take discount; decision clearly stated	Formula applied; minor arithmetic error (±2%); conclusion stated	Formula missing or wrong; no comparison to bank rate	/5
Part (c) — Effective Cost of Credit Line Usable funds = $200K × (1−0.10) = $180K · Interest = $200K × 9% = $18K · Effective rate = $18K ÷ $180K = 10% (not 9%)	Effective rate = 10% correctly derived; compensating balance reduces usable funds from $200K to $180K; interest still charged on full $200K explained	Correct method; arithmetic minor error; compensating balance concept shown	Compensating balance ignored; effective rate = 9% stated	/5
Part (d) — Two CCC Improvement Strategies + Community Impact	One receivables strategy (e.g., tighten credit terms, offer early payment discount, use invoice factoring) and one inventory strategy (e.g., adopt just-in-time, reduce safety stock, improve supplier lead times); explains shorter CCC = less cash trapped = more liquidity for operations, growth, or debt reduction — critical for undercapitalized community businesses; ≥4 underlined vocabulary terms	Two strategies offered but both target same area (both receivables or both inventory); community impact explained; some vocabulary terms	Only one strategy; no community impact connection; fewer than 2 vocabulary terms	/4

Extended Response Total: — / 20

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