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Corporate Finance


QUESTION 5 (2 + 3 + 3 + 2 + 2= 12 marks) A good friend of yours, who owns a fashion company, is confused by her firm’s statement of financial performance and statements of financial position, and comes to you for help. The statement of financial performance for the financial year ended at 30 June 2015, prepared by an accountant, shows a net profit of $110,000. However, there is only a $65,000 increase from 2014 to 2015 in the balance of her firm’s Cash at Bank account in the statement of financial positions for those years. She has checked with other accounting experts and they report no error or fraud. Yet, your friend is still very puzzled why the $65,000 increase in her firm’s Cash at Bank account from 2014 to 2015 does not equal the net profit of $110,000 made in the financial year that ended 30 September 2015. She is concerned about firm’s working capital and has provided you with the following ratios: 2013 2014 2015 Receivables turnover (days) 43 47 40 Inventory turnover (days) 57 60 61 Payables turnover (days) 42 30 50 REQUIRED a) Outline and discuss two reasons why a Net Profit amount can differ from the change in a firm’s Cash at Bank account from 2014 to 2015. b) Calculate the operating cash cycle period (days) for the 3 years and comments on management of working capital over the past 3 years. c) List three of the most common sources of short-term finance for entities. d) Explain the advantage of limited liability to companies. e) Explain how limited liability can be a disadvantage to some parties in business.