The purpose of the calculation and results is to show the efficiency of The Belgian Vandeputte Group through the assessment of its working capital. The results show the number of days the entity takes to transform its working capital into revenue. In this sense, they depict whether The Belgian Vandeputte Group is efficient in its revenue generation process. The entity’s high working capital in days metric shows that it needs to increase its efficiency by reducing the number of days it takes to generate revenues. The results are also designed to assist the entity in predicting its amount of revenues and rate of collecting payables (Vernimmen et al., 2014) . A high working capital in days could mean that the entity’s sales are diminishing or could point to an increase in the time taken by the firm to collect payment from its receivables.
The computation of the working capital can assist the entity in managing its current liabilities. An entity is likely to have current liabilities such as short-term loans, bank overdrafts, accounts payables, and outstanding expenses, given that having obligations is part of the entity's operations. For instance, an entity such as The Belgian Vandeputte Group may need to purchase raw materials on credit if it does not have sufficient cash in hand to ensure it produces the necessary goods to meet customer needs. The assessment of the firm’s working capital can show whether it has sufficient current assets to pay for the short-term obligations (Sagner, 2011) . If the working capital is high, the entity may acquire additional obligations without threatening its short-term survival. Based on its working capital, the entity can collect receivables at a faster rate to ensure it has sufficient cash in hand to reduce its short-term obligations.
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Exercise 1 Chapter 12
The aim of the calculations is to show how the entity's cash flow is computed. The results, specifically the cash flow statement, show the separation of Ivankovic's operating activities from financing and investment activities. The cash flow statement shows how the cash flow from operating activities can be derived from the cash flows and changes in working capital (Vernimmen et al., 2014) . In this case, they showcase how the movements in the entity’s working capital can lead to changes in its cash flow. For instance, an increase in the working capital means a reduction in the entity’s cash flow. The results also show that capital expenditures and dividend payments reduce Ivankovic’s overall cash flow since they are a form of outflows.
The computation of the cash flow is essential in allowing the entity to determine its cash position over a period. For enterprises such as Ivankovic to be successful, they must have adequate cash at all times. Cash is required by such firms to settle their expenses, pay their short-term debt, and acquire new assets (Mohana, 2011) . The assessment of the entity’s cash position through the creation of a cash flow statement can show how the entity has spent its cash. The entity can also use the past data regarding its cash flow to predict how much cash it will need in the future. In this case, the entity can create a cash flow budget highlighting how much cash it expects to receive and use in the future. The budget can act as a guiding tool in assisting the entity to minimize its expenses. The cash flow statement can assist the entity in creating a long-term financial strategy. It can show which activities the entity needs to prioritize to generate more cash. Long-term financial planning can determine whether the entity will succeed in the future.
References
Mohana, R. P. (2011). Financial statement analysis and reporting . PHI Learning Pvt. Ltd.
Sagner, J. S. (2011). Essentials of working capital management . Hoboken, N.J: Wiley.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice . John Wiley & Sons.
