Generating Less Cash even though More Sales and Higher Profits
James Chia, the Chairman and major shareholder of Pinnacle Electronics Group, had just received the audited financial statements of the company for the year ended 31 December 2012. He had been told that while sales were only slightly better than in 2011, the profits at almost $10 million were double the $5 million achieved in 2011.
He was very pleased with the results but suddenly noticed that despite the great improvement in profitability, the cash balance in the group had dropped from $36 million to $32 million. He was puzzled as he always thought higher profits meant more cash in the company. He called a meeting with the CEO (Timothy Paul) and VP of Finance (Melissa Kwan) to explain this to him.
1. As part of your preparation for the discussion, using the Excel Worksheet provided, compute the following for the GROUP (assuming even sales for each customer during the year and 365 days per year):
a. Accounts Receivable:
i. Show the COMPUTATION for the Overall (Weighted Average) DSO for 2011 and 2012 shown in the table.
ii. Actual DSO for customers MA and GS for 2011 and 2012.
iii. Computed amount of accounts receivable overdue for 2011 and 2012.
iv. Overdue Accounts Receivable % for 2011 and 2012.
b. Accounts Payable
i. Compute Accounts Payable Days for 2011 and 2012 c. Inventory i. Compute Inventory Days for 2011 and 2012 2. How do you think Melissa Kwan explained this to her big boss, and what actions do you think Timothy and Melissa would have planned in 2013 to overcome this in the future? (Note: Use the data from the Pinnacle Case Overview, the Audited Financial Statements, Supplementary Information provided, and the computations done in Assignment 1 above to help determine the causes and planned corrective action).
ANNEX A CASH BALANCE BY CURRENCY
The cash balances (rounded to the nearest thousand in Singapore Dollars) as of 31 Dec 2012 were as follows:
Entity Total Cash SGD Equiv USD