Question

Consider the following financial statement information for the Sourstone Corporation:

Item	Beginning		Ending
Inventory	$7,203		$9,041
Accounts receivable	3,069		3,995
Accounts payable	3,617		4,599
Net sales		$95,982
Cost of goods sold		59,814

Assume all sales are on credit. Calculate the operating and cash cycles. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Average Collection Period

Average Collection Period = Average Accounts Receivables / Credit Sales per day

= [($3,069 + $3,995)/2] + [$95,982 / 365 Days]

= $3,532 / $262.96 per day

= 13.43 Days

Days sales in Inventory

Days sales in Inventory = Average Inventory / Cost of goods sold per day

= [($7,203 + $9,041)/2] / [$59,814 / 365 Days]

= $8,122 / $163.87 per day

= 49.56 Days

Accounts Payables Deferral Period

Accounts Payable Deferral Period = Average Accounts Payable / Cost of goods sold per day

= [($3,617 + $4,599)/2] / [$59,814 / 365 Days]

= $4,108 / $163.87 per day

= 25.07 Days

Operating Cycle

Operating Cycle = Average Collection Period + Days sales in Inventory

= 13.43 Days + 49.56 Days

= 62.99 Days

Cash Cycle

Cash Cycle = Operating Cycle – Accounts Payables Deferral Period

= 62.99 Days – 25.07 Days

= 37.92 Days

Answer 2

To calculate the operating and cash cycles, we need to determine the number of days it takes for the company to convert its inventory and accounts receivable into cash.

Operating Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) Cash Cycle = Operating Cycle - Days Payable Outstanding (DPO)

1. Days Inventory Outstanding (DIO): DIO = (Average Inventory / Cost of Goods Sold) * 365

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Average Inventory = ($7,203 + $9,041) / 2 = $8,122

DIO = ($8,122 / $59,814) * 365 ≈ 49.74 days

2. Days Sales Outstanding (DSO): DSO = (Accounts Receivable / Net Sales) * 365

DSO = ($3,995 / $95,982) * 365 ≈ 15.19 days

3. Days Payable Outstanding (DPO): DPO = (Accounts Payable / Cost of Goods Sold) * 365

DPO = ($4,599 / $59,814) * 365 ≈ 28.08 days

Now, let's calculate the operating and cash cycles:

Operating Cycle = DIO + DSO Operating Cycle = 49.74 days + 15.19 days ≈ 64.93 days

Cash Cycle = Operating Cycle - DPO Cash Cycle = 64.93 days - 28.08 days ≈ 36.85 days

Therefore, the operating cycle is approximately 64.93 days and the cash cycle is approximately 36.85 days.