Question

1. The Mountain Top Shoppe has sales of $512,000, average accounts receivable of $31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent to 71 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?

2. HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $458,000. What is the average payment period? (Note: if you have a beginning and an ending balance for A/R, A/P, or inventory, you should average them before beginning calculations).

3. On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87 days on average to pay for its purchases. On the other hand, its average customer pays with a credit card which allows the firm to collect its receivables in 4 days. Given this information, what is the length of operating cycle?

4. Interior Designs has a days sales in inventory of 51 days, an average payment period of 38 days, and an average collection period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the average payment period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days.

5. If the new discount is taken from the previous problem, the cash cycle will be _____ days.

6. Breakwater Aquatics has a 45 day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400, respectively. What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days.

Answer 1

Answer 1:

Days taken to pay its suppliers = Days payable outstanding = 360 / (Cost of goods sold / Average payable)

= 360 / ((512000 * 71%) / 24800) = 24.56 days

Days taken to pay its suppliers = 24.56 days = 25 days

Answer 2:

Average payable = (57300 + 55100) /2 = 56200

Average payment period = Days payable outstanding = 360 / (458000 / 56200) =44.17 days

Average payment period = 44.17 days = 44 days

Answer 3:

Operating cycle (days) = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO)

= 27 days + 4 days

= 31 days

Operating cycle (days) = 31 days

Answer 4:

If the new discount is taken, the operating cycle will be = 51 days + 32 days = 83 days

Cash cycle = DIO + DSO - DPO

If the new discount is taken from the previous problem, the cash cycle will be= 51 + 32 - (38 - 26) = 71 days

Answer 5:

Breakwater Aquatics has a 45 day accounts receivable period.

Accounts receivable balance at the beginning of the third quarter = Second quarter sale * 45 /90

=7100 * 45/90 =$3,550

Accounts receivable balance at the beginning of the third quarter = $3,550