Question

The normal credit terms Jonas Company gives are Net 45.The normal terms it is given by its suppliers is Net 30.Its goal is to mantain 40 days of delivery on hand.

The following information is given by Jonas Company (see attached photo) at the most recent quarter end.The balance sheet accounts have been relatively unchanged over the past three months:

Inventory $250,650

Accounts Receivable. $525,000

Accounts payable. $136,250

Sales (for the quarter) $980,000

Cost of Goods Sold (for the quarter) $528,000

Part 1.Calculate the following cycles (in days to two decimal places)

A.Accounts payable period

B.Accounts recieveable period

C.Cash cycle

D.Inventory period

E.Operating cycle

2.Comment on whether Jonas Company is managing their working capital well.What might they do to improve their working capital management?

Answer 1

A. Accounts Payable Period = 365 * Accounts Payable/Cost of Goods Sold

= 365 * 136250/528000 * 1/4( since COGS is for the quarter)

= 23.55 days

B. Accounts receivable period = 365 * Accounts Receivable/Sales

= 365 * 525000/980000 *1/4(Since Sales is for the quarter)

= 48.88 days

D. .Inventory period = 365 * Inventory/Cost of Goods Sold

= 365 * 250650/528000 * 1/4( since COGS is for the quarter)

= 43.32 days

C. Cash cycle = Accounts receivable period + Inventory period - Accounts Payable Period

= (48.88 + 43.32 - 23.55) days

= 68.65 days

E. Operating cycle = Accounts receivable period + Inventory period

= (48.88 + 43.32) days

= 92.2 days

As evident from our calculations,

• the organisation receives from debtors in 48.88 days which is more than normal credit terms of 45 days.
• the organisation pays its creditors in 23.55 days which is less than normal payment terms of 30 days.
• the organisation converts inventory into sales in 43.32 days which is more than normal holding period of 40 days.

As a result, its cash cycle is greater than normal cash cycle of 45+40-30=55 days which means that it can pay suppliers later than current cycle if it wants to improve its working capital management because it is paying suppliers almost 6.5 days before time but taking around 4 days more to receive cash from debtor and around 3.5 days more to convert inventory into sales.