Question

Page 633 Calculating Cycles [LO1] Consider the following financial statement information for the Newk Corporation: Item Beginning Ending Inventory $11,718 $14,865 5,860 6,127 Accounts receivable Accounts payable 7,930 8,930 Credit sales $127,382 Cost of goods sold 76,157 Calculate the operating and cash cycles. How do you interpret your answer? Factoring Receivables 21 Vour firm bacanavar collection seriod of 31 deve Current bractica je to factor all receivable immediately at a discount of 15 arcant What is the

Answer 1

Ans.	Operating cycle = Days sales in inventory + Days sales in receivables
		63.70 days   +   17.17 days
		80.87 days
	Cash conversion period = Operating cycle   - Payable period
		80.87 days - 40.40 days
		40.47 days
	Explanations:   Operating cycle is also known as gross operating cycle which includes inventory
	holding period and receivable collection period. On the other hand cash cycles is the net operating
	cycle which excludes the payable period from operating cycle.
	WORKING   NOTES:
	*Average inventory = (Beginning inventory + Ending inventory) / 2
		($11,718 + $14,865) / 2
		$13,291.50
	*Average receivable = (Beginning receivables + Ending receivables) / 2
		($5,860 + $6,127) / 2
		$5,993.50
	*Average payable = (Beginning payable + Ending payable) / 2
		($7,930 + $8,930) / 2
		$8,430
	Days sales in inventory = Average Inventory / Cost of goods sold * Number of days in year
		$13,291.50 / $76,157 * 365
		63.70	days
	Days sales in receivables = Average receivables / Credit sales * Number of days in year
		$5,993.50 / $127,382 * 365
		17.17	days
	Days sales in payable = Average payable / Cost of goods sold * Number of days in year
		$8,430 / $76,157 * 365
		40.40	days