Question

You have the following balance sheet and income statement information for Epic Corp.:

Line item	Amount
Accounts receivable (A/R)	$1,760
Inventory	$3,960
Accounts payable (A/P)	$960
Sales	$6,600
Cost of goods sold	$5,280

All sales and purchases were on credit.

1. What is the firm's inventory period (in days)?

2. What is its average collection period (receivables period) (in days)?

3. What is its account payable period (in days)?

4. How long is the operating cycle (in days)?

5. How long is the cash cycle (in days)?

Answer 1

1

Inventory turnover = COGS/inventory

Inventory turnover = 5280/3960

Inventory turnover = 1.33

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

days of inventory on hand = 365/1.33

days of inventory on hand = 274.44

2

Receivables turnover = Credit sales/receivables

Receivables turnover = 6600/1760

Receivables turnover = 3.75

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

days of sales outstanding = 365/3.75

days of sales outstanding = 97.33

3

Accounts payables turnover = purchases/payables

Accounts payables turnover = 5280/960

Accounts payables turnover = 5.5

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

days of payables outstanding = 365/5.5

days of payables outstanding = 66.36

4

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

Operating cycle = 97.33+274.44

Operating cycle = 371.77

5

Cash conversion cycle = Operating cycle - days of payables outstanding

Cash cycle = 371.77-66.36

Cash cycle = 305.41