Question

What are the corporation’s working capital needs using the Bardahl formula, assuming that federal income taxes are not an operating expense?

Average inventory                                             $ 33,000

Cost of goods sold                                               300,000

Purchases                                                              250,000

Average accounts receivable balance                 80,000

Average credit sales                                            320,000

Average accounts payable balance                    30,000

Operating expenses                                            400,000

Depreciation as operating expense                    50,000

Federal income taxes paid as estimates             25,000

Advances to supplier                                            30,000

Answer 1

Inventory turnover (as a percent of the year) = $33,000/$300,000 = 0.11.

Accounts receivable turnover = $80,000/$320,000 = 0.25.

Credit turnover = $30,000/($400,000 - $50,000 + $250,000) = 0.05.

Operating cycle = (0.11 + 0.25 - 0.05) = 0.31.

Working capital needs = 0.31 x ($400,000 - $50,000 + $300,000 + $25,000) = $209,250.