The Operating and Cash Cycles Consider the following financial statement information for the Route 66 Company: Calculate the operating and cash cycles.

Question

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.

Accepted Answer

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.

Question 18.S-TP.1: The Operating and Cash Cycles Consider the following financi...

Related Answered Questions

You have collected the following information for the Slowpay Company: Credit sales for the year just ended were $50,000, and cost of goods sold was $30,000. How long does it take Slowpay to collect on its receivables? How long does merchandise stay around before it is sold? How long does Slowpay ...

Verified Answer:

For the year just ended, LuLu’s Pies had an average of $50,000 in accounts receivable. Credit sales were $500,000. LuLu’s factors its receivables by discounting them 3 percent—in other words, by selling them for 97 cents on the dollar. What is the effective interest rate on this source of ...

Verified Answer:

Here is a quick check of your understanding of sources and uses: If accounts payable go up by $100, does this indicate a source or a use? What if accounts receivable go up by $100? ...

Verified Answer:

Cash Balance for Greenwell Corporation The Greenwell Corporation has a 60-day average collection period and wishes to maintain a $160 million minimum cash balance. Based on this and the information given in the following cash budget, complete the cash budget. What conclusions do you draw? ...

Verified Answer: