You have collected the following information for the Slowpay Company:

Item Beginning Ending

Inventory $5,000 $7,000

Accounts receivable 1,600 2,400

Accounts payable 2,700 4,800

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?

Question

You have collected the following information for the Slowpay Company:

Item	Beginning	Ending
Inventory	$5,000	$7,000
Accounts receivable	1,600	2,400
Accounts payable	2,700	4,800

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?

Accepted Answer

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.

Question 18.2: You have collected the following information for the Slowpay...

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