Question

Question

(i) The following information is extracted from the financial statements of XERO
Limited:
Cash $677,423 Accounts Payable $1,721,669
Accounts Receivable $1,845,113 Notes Payable $2,113,345
Inventories $1,312,478
Total Current Assets $3,835,014 Total Current Liabilities $3,835,014
Net Sales $9,912,332
Cost $5,947,399

(b) What is the operating cycle for XERO Limited?

(c) What can you say about XERO Limited’s accounts receivable and inventory
management if it is known that the industry average operating cycle is 72 days?

(d) Briefly explain what you understand by the ‘cash conversion cycle’.

Answer 1

(b) What is the operating cycle for XERO Limited?

~ Inventory Days:

= Inventory / COGS x 365

= $1,312,478 / $5,947,399 x 365

= 80.55 days

~ Receivable Days:

= Receivables / Sales x 365

= $1,845,113 /  $9,912,332 x 365

= 67.94 days

~ Operating Cycle of XERO Ltd.:

= Inventory Days + Receivable Days

= 80.55 days + 67.94 days

= 148.49

Operating Cycle of XERO Ltd. = 148 days

(c) What can you say about XERO Limited’s accounts receivable and inventory
management if it is known that the industry average operating cycle is 72 days?

~ The industry average operating cycle is 72 days, while that of Xero Ltd is 148 days.

~ Therefore, it can be said that the inventory and accounts receivable management at Xero Ltd is very poor compared to the industry.

~ Xero Limited takes double the time period than the industry for converting its inventory into sales, and collecting the sale amount from its debtors.

d) Briefly explain what you understand by the ‘cash conversion cycle’.

~ Cash Conversion Cycle = Inventory Days + Receivable Days - Payable Days

~ Cash conversion cycle means the total period that a company takes to convert its investment in inventories into cash, after completing the process of selling, collecting the receivables, and paying to the trade payables.

~ The shorter the cash conversion cycle, the better the management of inventories, receivables and payables.