2. Master and Cash budgets & 3. Pro Forma

Question 1

Cash conversion cycle

Answer 1

Inventory inventory holding period + AR collection period - AP payable payment period

Question 2

What does a negative and positive cash conversion cycle mean

Answer 2

Posicitive means that is a gap ebtween inflows and outflows - this gap must be financed wtih debt or surplus of cash - meaning that there can be improvements to shorten this gap by either reducing collection period, inventory holding period, or extending suppliymer payment period to reduce the days of the conversion

Ngeative - there is excess cash and should invest it, pay down debt, or distribute to shareholders

Question 3

Operating cycle

Answer 3

holding period + customer collection period

Question 4

What are the limitaiton of preparing and using a pro-forma financial statement

Answer 4

It is difficult to predict the future based on realistic assumptions, the further the projections are made, the more difficult it will be to use realistic assumptions and estimates.