(a). Calculate the length of Rowet’s cash conversion cycle and discuss it significance to the company.(b). Using the information given, assess whether Rowett should accept the factoring service offeredby Powell. What use should the company make of any finance provided by the factor? Please help me with quastion A just (a). Calculate the length of Rowet’s cash conversion cycle and discuss it significance to the company. Question 1The following has been extracted from the financial statements of Rowett:Statement of profit or loss extracts£000£000Revenue12,000Cost of sales:Raw materials5,800Labour3,0608,860Gross profit3,140Administration/distribution1,680Profit before interest and tax1,460Financial position statement extracts£000£000Current assets:Inventory of raw materials1,634Inventories of finished goods2,018Trade receivables1,538Cash and bank5005,690Current liabilities:Trade payables1,092Overdraft300Other expenses761,468Powell, a factoring company, has offered to take over Rowett's debt administration and credit controlon a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett £160,000 peryear in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell wouldreduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at aninterest rate of 10 per cent.Rowett finances working capital from an overdraft at 8 per cent.

Cash conversion cycle indicates that number of days required to recover money from inventories to…

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FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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(a). Calculate the length of Rowet’s cash conversion cycle and discuss it significance to the company.

(b). Using the information given, assess whether Rowett should accept the factoring service offered
by Powell. What use should the company make of any finance provided by the factor?

Please help me with quastion A just
(a). Calculate the length of Rowet’s cash conversion cycle and discuss it significance to the company.

Question 1
The following has been extracted from the financial statements of Rowett:
Statement of profit or loss extracts
£000
£000
Revenue
12,000
Cost of sales:
Raw materials
5,800
Labour
3,060
8,860
Gross profit
3,140
Administration/distribution
1,680
Profit before interest and tax
1,460
Financial position statement extracts
£000
£000
Current assets:
Inventory of raw materials
1,634
Inventories of finished goods
2,018
Trade receivables
1,538
Cash and bank
500
5,690
Current liabilities:
Trade payables
1,092
Overdraft
300
Other expenses
76
1,468
Powell, a factoring company, has offered to take over Rowett's debt administration and credit control
on a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett £160,000 per
year in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell would
reduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at an
interest rate of 10 per cent.
Rowett finances working capital from an overdraft at 8 per cent.

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(b). Using the information given, assess whether Rowett should accept the factoring service offered
by Powell. What use should the company make of any finance provided by the factor?

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