Question

Question 8

The following information is extracted from the financial statements of XP Sports 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

1. Briefly explain what you understand by the term ‘operating cycle’.               

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2. What is the operating cycle for XP Sports Limited?                                          

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3. What can you say about XP Sports accounts receivable and inventory management if it is known that the industry average operating cycle is 72 days?                                         (1 mark)

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

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5. What is the cash conversion cycle for XP Sports Limited?                               

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6. What can you say about XP Sports cash conversion cycle if it is known that the industry average cash conversion cycle is 42 days?                                                                         (1 mark)

Answer 1

A. An operating cycle refers to the time it takes a company to buy goods, sell them and receive cash from the sale of said goods,In other words,how long company converts inventories into cash,the shorter operating cycle meens,the company is having enough to maintain.

B Oerating cycl=inventory period+account recivebel period

inventory period=365/inventory tournover

inventory tourover=COGS/Ainventory

=5947399/1312478

= 4.531

inventory period=365/inventory tournover

=365/4.531

Recivebel tournover=credit sales/average recivebels

average recivebels=365/recivebel tourn over

Recivebel tournover=credit sales/average recivebels

=9912332/1845113

=5.372

average recivebels=365/recivebel tourn over

=365/5.3722

=67.94

B Oerating cycl=inventory period+account recivebel period

=80.54+67.94

=148.48

cash conversision =days inventories+days of sales-days payabel out standing

days inventories=A INVENTORY/365*COST