Question

a)      Canadian Bacon Inc. financial statements are presented in the table below.

            Based on the information in the table, and using a 365-day year, calculate operating cycle.

Round the answers to two decimal places

Balance Sheet December 31, 2014

Cash and marketable securities	$132,000	Accounts payable	$399,000
Accounts receivable	$311,000	Notes payable	$98,500
Inventories	$512,000	Accrued expenses	$89,300
Prepaid expenses	$11,300	Total current liabilities	$586,800
Total current assets	$966,300	Long-term debt	$799,400
Gross fixed assets	$2,104,000	Par value and paid-in-capital	$298,000
Less: accumulated depreciation	$398,000	Retained Earnings	$988,100
Net fixed assets	$1,706,000	Common Equity	1,286,100
Total assets	$2,672,300	Total liabilities and owner’s equity	$2,672,300

Income Statement, Year of 2014

Net sales (all credit)	$4,276,600.00
Less: Cost of goods sold	$3,292,982.00
Selling and administrative expenses	$349,000.00
Depreciation expense	$148,000.00
EBIT	$486,618.00
Interest expense	$49,600.00
Earnings before taxes	$437,018.00
Income taxes	$174,807.20
Net income	$262,210.80

Answer 1

Operating cycle is the time it takes for a company to buy goods, sell them and receive cash from the sale of these goods. In other words, it's how long it takes a company to turn its inventories into cash.

operating cycle = inventory period + accounts receivable period

This stems directly from the definition of operating cycle. Let us break down the calculation into the following steps:

Step 1: Determine the inventory period

Inventory period is the time it takes for a company to sell it's inventory.

inventory period = 365 / inventory turnover

inventory turnover = Cost of goods sold / Average inventory

The inventory can be found on the company's balance sheet, whereas the cost of goods sold can be found on the company's income statement.

inventory turnover = $3,292,982 / $512,000 = 6.43

inventory period = 365 / inventory turnover = 56.75 days

Step 2: Determine accounts receivable period

Accounts receivable is the amount of money owed ot the company.

accounts receivable period = 365 / receivables turnover

receivables turnover = Credit Sales / Average account receivables

The sales (credit) can be found on the company's income statement, whereas the accounts receivables can be found on the company's balance sheet.

receivables turnover = $4,276,600 / $311,000 = 13.75

accounts receivable period = 365 / receivables turnover = 26.54 days

Step 3: Calculate the operating cycle

As noted earlier,

operating cycle = inventory period + accounts receivable period

= 56.75 days + 26.54 days

= 83.29 days