Learning Team Assignment: Xtreme Toys Case Study

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Learning Team Assignment:

Xtreme Toys Case Study

Nathan Church

Megan Leite-Ferraz

David Oxley

Sue Oxley

Michael Shannon

FIN 475

March 24, 2004


Xtreme Toys Case Study

        Imagine the excitement of the management team at Xtreme Toys at their recent board meeting when told about the company’s increased sales statistics. However, joy soon turned to bewilderment when confronted by the company’s shrinking cash flow situation. Convinced that the figures must have been misstated, the board members appointed a team from the finance accounting department to investigate. The following paper details the team’s findings, including their recommendations on what actions the company should adopt to reduce its cash gap predicament.

The Situation

        Xtreme Toys is a small manufacturing company in Southern California that has experienced rapid expansion in sales over the past year. The expanding sales have caused intense pressure for increased inventory production, combined with a receivables buildup that is now draining the company of its cash resources. With management focused on increasing sales as the best way for the company to prosper, insufficient resources were dedicated to working capital management. The substantial growth in sales has increased the company’s current assets such as accounts receivables and inventory, and now requires financing beyond internal funds and retained earnings.

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The Figures

          By studying the company balance sheet, the investigatory team soon found reasons for concern. The current inventory conversion period is running at 113 days. Taking almost four months to turn inventory into a sale puts an increased strain on the company’s cash position. One possible explanation for this could be that as the company has expanded its sales, so the inventory has turned from self-liquidating assets i.e. inventory that is produced and immediately sold, to the “permanent” current asset inventory, such as the floor displays and non-seasonal items.

        Added to the inventory turnover situation is the ...

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