Question

2. Consider the following financial statement information for the Rivers Corporation: Item Beginning Ending Inventory $17,385 $19,108 Accounts receivable 13,182 13,973 Accounts payable 15,385 16,676 Net sales $216,384 Cost of goods sold 165,763 Calculate the operating and cash cycles. How do you interpret your answer

Answer 1

Answer:

Inventory period = 365 * Average Inventory / Cost of Goods Sold
Average Inventory = ($17,385 + $19,108) / 2
Average Inventory = $18,246.50

Inventory period = 365 * $18,246.50 / $165,763
Inventory period = 40.18 days

Accounts Receivable Period = 365 * Average Receivables / Sales
Average Receivables = ($13,182 + $13,973) / 2
Average Receivables = $13,577.50

Accounts Receivable Period = 365 * $13,577.50 / $216,384
Accounts Receivable Period = 22.90 days

Operating Cycle = Inventory Period + Accounts Receivable Period
Operating Cycle = 40.18 days + 22.90 days
Operating Cycle = 63.08 days

Accounts Payable Period = 365 * Average Payables / Cost of Goods Sold
Average Payables = ($15,385 + $16,676) / 2
Average Payables = $16,030.50

Accounts Payable Period = 365 * $16,030.50 / $165,763
Accounts Payable Period = 35.30 days

Cash Cycle = Operating Cycle – Accounts Payable Period
Cash Cycle = 63.08 days – 35.30 days
Cash Cycle = 27.78 days