Question

1. You have collected the following information for the Mumias limited:

Item	Beginning	Ending
Inventory	$6,000	$4,000
Accounts Receivable	$1,800	$2,600
Accounts payable	$2,800	$5,000

Credit sales for the year just ended were $ 50,000 and cost of goods sold was $30,000

Required

1. How long does it take Mumias Ltd to collect on its receivables?
2. How long does merchandise stay around before it is sold
3. How long does Mumias Ltd take to pay its bills
4. Calculate the cash cycle and operating cycle

Answer 1

soution 1. Calulation of Days that mumias Ltd. takey colled its deceivables é - It can be calulated as number of days divided by accounts receivable Tumorer oratio. | Accounts receivable ratio indicates the compan? ability to collect its accounts receivable and it I can be calculated as: Credit sales Arg. A les zeceivables - - 50,000__ = 22.73 1800+2600 Lu No. of Days that mumias atd. take to colled itd zeceivables ases 365 (No. of days in a yecal 22,73 = 16.06 days 3 16. days

2. Calculation of number of days for which merchandise to stay before it is sold & 14 can be calculated and number of days divided by lovenlooy Tumorer ratio - Lovestory Tumorer satio means how many a times a business sells and replaces its inventory is a given Deriod of time It will be calculated as & COGS Aug, Inventory = 6 times. 6000+ 4000 co Ho.of_days calculation 365 = 60.83 days = 61 days

3. | Calulation_of_no.0.1 days_act_mumiau dedatoke H o pay ils_bills - It can be caluated as number of days divided by Accounts payable ratio . — Ales poyable ratio is a liquidity ratio that measu bow many times a company is able to pay ite Creditar over a span of time | It can be calculated as 6 Percbesee - Avgi Ales payable Purchased E Closing Onventory tlogs – Opening _ Svenlooly = 6000 + 30,000 – 4000 - 32.000 i Ales payable ratio = 32,000 = 6.4 timere 4000+6000 No. of daye thol mumias de toke to pay is bius. z 365. = 57,03 days - =57 days

41 4 Operaling-cycle : Povestory_Pested talis deceivable I period Lorectory period is the amount of lime inventory _sits in staroge until sold and Alcs receivable period is the time it takes to collect cosh from sale of the forentory- de = 60.83 +2273 __ = 83.56 days - = 84 days - O cil Cash cycle = Lovestory period + Ales receivable period -' Ales payable period = 60.83 + 22.73 – 57.03 = 26.53 days - On an arerage it takee 27 days cash inreatment in inventory back to tum its initial into cash.