Question

Question 6 (This question is from the Week 11 Tutorial) The following data available for ABC company. Account Beginning balance Ending Balance Use/source of cash Accounts payable 20,300 24,400 Inventory 60,600 67,200 Long term debts 127,500 125,800 Common stock 200,400 215,900 Required:

a) Calculate and identify the source of cash or the use of cash for each account change by filling into the column next to the ending balance.
b) Assume that beginning balance of accounts receivable is $23 400 and ending balance of accounts receivable of $22 300, total revenue is $237 000, total cost of sales is $ 165 000 and all sales are on credit. Calculate the operating cycle and cash cycle and interpret the outcomes

Answer 1

A) Calculation for sources and uses of Cash

Accounts title	Ending Balance (A)	Beginning Balance (B)	Increase/(Decrease) (C) = A - B	Source / Use of Cash
Accounts Payable	24,400	20,300	4,100	Source of Cash
Inventory	67,200	60,600	6,600	Use of Cash
Long term debts	125,800	127,500	(1,700)	Use of Cash
Common stock	215,900	200,400	15,500	Source of Cash

Net cash inflows = [ Total source of cash - Total use of cash ] = [ $ 4,100 + $ 15,500 ] - [ $ 6,600 + $ 1,700 ] = $ 11,300

B) Average accounts receivable = [ Opening accounts receivables + Closing accounts receivable ] / 2

Average accounts receivable = [ $ 23,400 + $ 22,300 ] / 2 = $ 22,850

Accounts receivable turn over ratio = Net Sales / Average Accounts receivable = $ 237,000 / $ 22,850 = 10.37 times

Days in sales outstanding = 365 days / 10.37 = 35.20 days

Average inventory = [ opening inventory + Closing inventory ] /2 = [ $ 60,600 + $ 67,200 ] / 2 = $ 63,900

Inventory turn over ratio = Cost of sales / Average inventory = $ 165,000 / $ 63,900 = 2.58 times

Days in sales of inventory = 365 days / 2.58 = 141.47 days

Average accounts payable = [ Opening accounts payable + closing accounts payable ] / 2

Average accounts payable = [ $ 20,300 + $ 24,400 ] / 2 = $ 22,350

Cost of goods sold = Opening inventory + Purchase - Closing inventory

$ 165,000 = $ 60,600 + Purchase - $ 67,200

Purchase = $ 165,000 + $ 67,200 - $ 60,600 = $ 171,600 ( Assumed credit purchase)

Accounts payable turn over ratio = Credit purchase / Average accounts payable

Accounts payable turn over ratio = $ 171,600 / $ 22,350 = 7.68 times

Days payable outstanding = 365 days / 7.68 = 47.53 days

Operating Cycle = Days sales outstanding + Days in sales of inventory = 35.20 days + 141.47 days = 176.67 days

Cash cycle = Days sales outstanding + Days in sales of inventory - Days payable outstanding

Cash cycle = 35.20 days + 141.47 days - 47.53 days = 129.14 days.

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