Extreme Toys is a small toy manufacturing company in Southern California that has been in business for a number of years. Recently as a result of a new line of video games and related action figures developed by Extreme Toys' designers, sales have increased significantly over a short period of time. While the success of this new line of video games and action figures has boosted profits, management has come across a working capital management issue that needs to be addressed soon if the company is expected to continue to sustain operations. Learning Team A has been hired as consultants to analyze Xtreme Toys' financial statements and to help their management team both understand what the sources of the working capital management are and what the best available options are to resolve these issues.
Inventory conversion periodThis is the time between buying materials to produce finished products and the sale to customers of the finished product.
The conversion is the time between receipts of orders until the product is ready for delivery to the customer. Then from the time raw material arrives until the invoice is paid this is the deferral time. Once cash has been received from the sale of the finished goods this is referred to as the receivable conversion period.
Payables deferral PeriodPayables deferral period is the time between purchases of materials needed to build our finished products and when a company must pay the original vendor for the materials. This can be accomplished by extended credit from the vendor, often vendors will allow their customer's terms such as 10 net 30. So if they pay within 10 days they can take a pre-determined discount, if not then they must pay in full by 30 days to avoid possible penalties. Further some vendors can or might extend...