Question

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, 2013

Cash and marketable securities	$112,000	Accounts payable	$211,000
Accounts receivable	$325,000	Notes payable	$51,500
Inventories	$426,000	Accrued expenses	$50,100
Prepaid expenses	$10,700	Total current liabilities	$312,600
Total current assets	$873,700	Long-term debt	$225,000
Gross fixed assets	$1,514,000	Par value and paid-in-capital	$117,000
Less: accumulated depreciation	$315,000	Retained Earnings	$1,418,100
Net fixed assets	$1,199,000	Common Equity	1,535,100
Total assets	$2,072,700	Total liabilities and owner’s equity	$2,072,700

Income Statement, Year of 2013

Net sales (all credit)	$3,256,600.00
Less: Cost of goods sold	$2,572,714.00
Selling and administrative expenses	$323,000.00
Depreciation expense	$115,000.00
EBIT	$245,886.00
Interest expense	$29,600.00
Earnings before taxes	$216,286.00
Income taxes	$86,514.40
Net income	$129,771.60

Answer 1

Compute the day’s sales of inventory, using the equation as shown below:

Days sales of inventory = Days in a year*Inventory/ COGS

                                       = 365 days*$426,000/2,572,714

                                       = 60.44 days

Hence, the day’s sales of inventory are 60.44 days.

Compute the debtor collection period, using the equation as shown below:

Debtor collection period = Days in a year*Accounts receivables/ Net credit sales

                                        = 365 days*$325,000/ $3,256,600

                                        = 36.43 days

Hence, the debtor collection period is 36.43 days.

Compute the operating cycle, using the equation as shown below:

Operating cycle = Day’s sales of inventory + Debtor collection period

                          = 60.44 days + 36.43 days

                          = 96.87 days

Hence, the operating cycle is 96.87 days.