Question

6.          Calculate the Operating and Cash Cycles.
Item				Beginning		Ending
Inventory				$10,000		$11,000
Accounts Receivable				$5,000		$6,000
Accounts Payable				$6,000		$65,000
	Net Sales				$140,000
	Cost of Goods Sold				$85,000
Operating Cycle			Days
Cash Cycle			Days

Please put the excel formulas en step by step solution so i can understand . thank you

What does Operating and Cash Cycles tell you? Why are they important?

Answer 1

Please find the solution ; -

1) CONCEPT

> Operating cycle refers to number of days a company takes in converting its inventories to cash. It equals the time taken in selling inventories (days inventories outstanding) plus the time taken in recovering cash from trade receivables (days sales outstanding).

Operating cycle = DIO + DSO

where DIO = Days inventories outstanding

          DSO = Days sales outstanding

> Cash Conversion Cycle (CCC) is a metric that shows the amount of time it takes a company to convert its investments in inventory to cash. The conversion cycle formula measures the amount of time, in days, it takes for a company to turn its resource inputs into cash.

Cash Conversion Cycle = DIO + DSO – DPO

where DIO = Days inventories outstanding

          DSO = Days sales outstanding

         DPO = Days Payable Outstanding

2) CALCULATION

- DIO = [365/Cost of good sold] * Average inventory

         = [365/85000]*10000

         = 42.94 days

- DSO = [365/sales] * Average debtors

           = [365/140000] * [(6000+5000)/2]

           = 14.34 days

- DPO = [365/Cost of good sold] * Average creditors

            = [365/85000] * [(6000+6500)/2]

            = 26.84 days

Operating Cycle = 42.94 + 14.34

                           = 57.28 days

                               or 57 days

Cash Cycle = 42.94 + 14.34 - 26.84

                      = 30.44 or 30 days