working capital management: how this transaction might affect dynamic mattress in cash and net working capital, customer paying a $2,500 bill resulting from a previous sale. Paying $5,000 previously owed to one of its suppliers, borrowing $1 million long-term and investing the proceeds in inventory. borrowing $1 million short-term investing in inventory, selling $5 million of marketable securities for cash.
To analyze how each transaction affects Dynamic Mattress's cash and net working capital, we will break down each transaction and calculate the impact step by step. Let's go through them one by one:
1. Customer paying a $2,500 bill resulting from a previous sale:
- This transaction will increase cash by $2,500 since the customer is paying the amount owed.
- There will be no impact on net working capital since both the accounts receivable (due from the customer) and accounts payable (owed to suppliers) decrease by the same amount.
2. Paying $5,000 previously owed to one of its suppliers:
- This transaction will decrease cash by $5,000 since Dynamic Mattress is paying its debt.
- There will be no impact on net working capital since both the accounts payable and cash decrease by the same amount.
3. Borrowing $1 million long-term and investing the proceeds in inventory:
- This transaction increases cash by $1 million as a result of the borrowing.
- The investment in inventory will decrease cash by the amount spent on inventory.
- Net working capital remains unchanged since both current assets (cash and inventory) increase by the same amount, while long-term liabilities (long-term borrowings) increase.
4. Borrowing $1 million short-term and investing in inventory:
- This transaction increases cash by $1 million as a result of the borrowing.
- The investment in inventory will decrease cash by the amount spent on inventory.
- Net working capital remains unchanged since both current assets (cash and inventory) increase by the same amount, while short-term liabilities (short-term borrowings) increase.
5. Selling $5 million of marketable securities for cash:
- This transaction increases cash by $5 million as a result of the sale.
- There will be no impact on net working capital since marketable securities are part of current assets and cash is increasing by the same amount.
Overall, the impact on cash and net working capital for each transaction is as follows:
- Cash:
- +$2,500 (customer payment)
- -$5,000 (supplier payment)
- +$1 million (long-term borrowing)
- +$1 million (short-term borrowing)
- +$5 million (sale of marketable securities)
- Net Working Capital:
- No change in net working capital for each individual transaction.
Please note that these calculations are based on the information provided and other factors such as taxes or transaction costs are not considered. It's always a good practice to consult a financial professional or accountant for more precise analysis.