Question

Calvani, Inc., has a cash cycle of 44.5 days, an operating cycle of 65 days, and an inventory period of 28 days. The company reported cost of goods sold in the amount of $344,000, and credit sales were $567,000.

What is the company’s average balance in accounts payable and accounts receivable?

Average accounts payable $ _______

Average accounts receivable $______

Answer 1

i) Average accounts recievables calculations

a) Operating cycle = Days inventory outstanding + Days sales outstanding

Here, Operating cycle = 65 days

Days inventory outstanding = 28 days

Now, put the values into formula

65 days = 28 days + Days sales outstanding

Days sales outstanding = 65 days - 28 days

Days sales outstanding = 37 days

b) Days sales outstanding = Average accounts recievables / Credit sales * 365 days

Here,

Credit sales = $5,67,000

Days sales outstanding = 37 days

Now,

37 days = (Average accounts recievables / $5,67,000) * 365 days

(37 days / 365 days) * $5,67,000 = Average accounts recievables

Average accounts recievables = $57,477

ii) Average accounts payables calculations

a) Cash cycle = Days inventory outstanding (DIO) + Days sales outstanding (DSO) - Days payables outstanding (DPO)

Here, DIO = 28 days

DSO = 37 days

Cash cycle = 44.50 days

Now, put the values into formula

44.50 days = 28 days + 37 days - DPO

DPO = 28 + 37 - 44.50

DPO (Days payables outstanding) = 20.50 days

b) Days payables outstanding (DPO) = Average accounts payables / Cost of goods sold * 365 days

Here, DPO = 20.50 days

Cost of goods sold = $3,44,000

Now,

20.50 days = (Average accounts payables / $3,44,000) * 365 days

(20.50 days / 365 days) * $3,44,000 = Average accounts payables

Average accounts payables = $19,321

Note :

i) It is assumed that there is 365 days in a year.

ii) Figures are rounded off.