Question 18.2: The Operating and Cash Cycles You have collected the follow...
The Operating and Cash Cycles
You have collected the following information for the Slowpay Company:
| Ending | Beginning | Item |
| $7,000 | $5,000 | Inventory |
| 2,400 | 1,600 | Accounts receivable |
| 4,800 | 2,700 | Accounts payable |
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 take to pay its bills?
We can first calculate the three turnover ratios:
Inventory turnover = $30,000 / 6,000 = 5 times
Receivables turnover = $50,000 / 2,000 = 25 times
Payables turnover = $30,000 / 3,750 = 8 times
We use these to get the various periods:
Inventory period = 365 / 5 = 73 days
Receivables period = 365 / 25 = 14.6 days
Payables period = 365 / 8 = 45.6 days
All told, Slowpay collects on a sale in 14.6 days, inventory sits around for 73 days, and bills get paid after about 46 days. The operating cycle here is the sum of the inventory and receivables periods: 73 + 14.6 = 87.6 days. The cash cycle is the difference between the operating cycle and the payables period: 87.6 – 45.6 = 42 days