Due to significant changes to the financial environment in one of the main Omega’s markets it is expected that the average collection period will increase to 50 days. Omega is in the process of negotiating a long-term loan and the CFO is concerned on the credit outlook of the company. The CFO has decided to reduce cash and cash equivalents to €400,000. However, further actions are needed. You are asked to examine two extreme what-if scenarios to help the CFO decide the future financial policy of Omega. The first is to decrease inventories, and the other is to hold back Omega’s payments by increasing the accounts payable. Assume all other amounts as the same.
Required:
1. Calculate the impact on accounts receivables of the increase of the average collection period .
2. Prepare the balanced sheet of each scenario, also taking into account the reduction in cash and cash equivalents. Please prefer to report them in comparative form
3. Calculate for each scenario the a) working capital, b) current ratio, c) acid-test ratio, d) cash to current liabilities ratio, e) days’ sales in receivables (based on ending accounts receivables), f) days’ sales in inventory (based on ending inventory), g) operating cycle, h) total debt to equity ratio and i) times interest earned. For your calculations, assume that a year amounts for 360 days .
4. Based on your calculations advice on which scenario should be given emphasis and justify your position. In your report include the practical implications of each ratio, and on the potential changes of each but avoid giving definitions (about 300 words)
