Managing Working Capital. A new computer system allows your firm to more accurately monitor inventory and anticipate future inventory shortfalls. As a result, the firm feels more able to pare down its inventory levels. What effect will the new system have on working capital and on the cash conversion cycle?

Lower inventory requirements means less capital requirements, and less time between paying for raw materials (parts) and receiving the proceeds of sale of the finished product.

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During 2012, the company completed the following selected transactions. Journalize each transaction. Explanations are not required.

a. Issued for cash 1,300 shares of preferred stock at par value.
b. Issued for cash 2,400 shares of common stock at a price of $5 per share.
c. Net income for the year was $74,000, and the company declared no dividends. Make the closing entry for net income.
2. Prepare the stockholders’ equity section of the Lincoln-Priest balance sheet at December 31, 2012.

The new computer system that allows your firm to more accurately monitor inventory and anticipate future inventory shortfalls is expected to have a positive impact on working capital and the cash conversion cycle.

Working capital refers to the amount of capital (funds) that a company requires to finance its day-to-day operations. It is calculated by subtracting current liabilities (such as accounts payable and short-term debt) from current assets (such as cash, inventory, and accounts receivable). Working capital management involves optimizing the utilization of current assets and liabilities to ensure smooth business operations.

With the ability to monitor inventory more accurately and anticipate future shortages, the firm can pare down its inventory levels without risking stockouts. This means that the firm can reduce the amount of cash tied up in inventory, which leads to a decrease in current assets.

The cash conversion cycle (CCC) measures the time it takes for a company to convert its investments in inventory and other current assets into cash from sales. It is calculated by adding the average age of inventory (AAI), the average collection period (ACP), and the average payment period (APP).

By having a more accurate inventory monitoring system, the firm can better manage its inventory levels and improve inventory turnover. This leads to a reduction in the average age of inventory, resulting in a decrease in the CCC.

In summary, the new computer system is likely to have a positive impact on working capital by reducing the amount of cash tied up in inventory. It is also expected to decrease the cash conversion cycle by improving inventory turnover and reducing the average age of inventory.