Question

Consider the following financial statement information for the Trenbolone Palladium Corporation:

Item	Beginning		Ending
Inventory	$9,215		$10,876
Accounts Receivable	5,387		5,932
Accounts Payable	7,438		7,847
Net Sales		$85,682
Cost of goods sold		57,687

Calculate the operating and cash cycles.  How do you interpret the answer?

Answer 1

Given,

Beginning inventory = $9215

Ending inventory = $10876

Beginning accounts receivable = $5387

Ending accounts receivable = $5932

Beginning accounts payable = $7438

Ending accounts payable = $7847

Net sales = $85682

Cost of goods sold = $57687

Solution :-

Average inventory = (beginning inventory + ending inventory)/2

= ($9215 + $10876)/2

= $20091/2 = $10045.50

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable)/2

= ($5387 + $5932)/2

= $11319/2 = $5659.50

Average accounts payable = (Beginning accounts payable + Ending accounts payable)/2

= ($7438 + $7847)/2

= $15285/2 = $7642.50

Inventory period = Average inventory/cost of goods sold x 365 days

= $10045.50/$57687 x 365 days = 63.56037755 days

Receivables period = Average accounts receivable/net sales x 365 days

= $5659.50/$85682 x 365 days = 24.1091186 days

Payables period = Average accounts payable/cost of goods sold x 365 days

  = $7642.50/$57687 x 365 days = 48.35599875 days

Now,

Operating cycle = Inventory period + receivables period

= 63.56037755 days + 24.1091186 days = 87.66949615 or 87.67 days

Cash cycle = Operating cycle - Payables period

= 87.66949615 days - 48.35599875 days = 39.3134974 or 39.31 days

The firm is receiving cash on average 39.31 days after it pays its bills.