Question

Consider the following financial statement information for the Newk Corporation: Item Beginning Ending Inventory $ 11,500 $ 12,500 Accounts receivable 6,500 6,800 Accounts payable 8,700 9,100 Credit sales $ 95,000 Cost of goods sold 75,000 Calculate the operating and cash cycles.

(Use 365 days a year. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Operating cycle ____ days

Cash cycle ____ days

Answer 1

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

Average inventory = (11500+12500)/2

Average inventory = 12000

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

Average Receivables = (6500+6800)/2

Average Receivables = 6650

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

Average Payables = (8700+9100)/2

Average Payables = 8900

Inventory turnover = COGS/inventory

Inventory turnover = 75000/12000

Inventory turnover = 6.25

days of inventory on hand = number of days in a year/inventory turnover

days of inventory on hand = 365/6.25

days of inventory on hand = 58.4

Receivables turnover = Credit sales/receivables

Receivables turnover = 95000/6650

Receivables turnover = 14.29

days of sales outstanding = number of days in a year/receivables turnover

days of sales outstanding = 365/14.29

days of sales outstanding = 25.54

Accounts payables turnover = COGS/payables

Accounts payables turnover = 75000/8900

Accounts payables turnover = 8.43

days of payables outstanding = number of days in a year/accounts payable turnover

days of payables outstanding = 365/8.43

days of payables outstanding = 43.3

Operating cycle = days of sales outstanding + days of inventory on hand

Operating cycle = 25.54+58.4

Operating cycle = 83.94

Cash conversion cycle = Operating cycle - days of payables outstanding

Cash cycle = 83.94-43.3

Cash cycle = 40.64