Question 18.S-TP.1: The Operating and Cash Cycles Consider the following financi...
The Operating and Cash Cycles Consider the following financial statement information for the Route 66 Company:
| Item | Beginning | Ending | |
| Inventory | $1,273 | $1,401 | |
| Accounts receivable | 3,782 | 3,368 | |
| Accounts payable | 1,795 | 2,025 | |
| Net sales | $14,750 | ||
| Cost of goods sold | 11,375 |
Calculate the operating and cash cycles.
We first need the turnover ratios. Note that we use the average values for all balance sheet items and that we base the inventory and payables turnover measures on cost of goods sold:
Inventory turnover = $11,375/[($1,273 + 1,401)/2] = 8.51 times
Receivables turnover = $14,750/[($3,782 + 3,368)/2] = 4.13 times
Payables turnover = $11,375/[($1,795 + 2,025)/2] = 5.96 times
We can now calculate the various periods:
Inventory period = 365 days/8.51 times = 42.90 days
Receivables period = 365 days/4.13 times = 88.47 days
Payables period = 365 days/5.96 times = 61.29 days
So the time it takes to acquire inventory and sell it is about 43 days. Collection takes another 88 days, and the operating cycle is thus 43 + 88 = 131 days. The cash cycle is 131 days less the payables period: 131 − 61 = 70 days.