Question

Alpha Company would like to estimate how long it will take to realize cash from its ending inventory. For this purpose the following data are submitted:

Accounts Receivable, less allowance for doubtful accounts of $40,000	$  660,000
Ending Inventory	750,000
Net Sales	5,650,000
Cost of Goods Sold	4,250,000

1. Estimate how long it will take to realize cash from the account receivables.
2. Estimate how long it will take to sell all ending inventory.
3. Estimate how long it will take to realize cash from the ending inventory.

Answer 1

Operating cycle is the period of time between acquisition of goods and realization of cash sales and collection.

Operating cycle = Account receivable turnover in days+Inventory turnover in days

Days sales in receivable = Gross receivables ÷ (Net sales/365)

= $ 700000÷($ 5650000/365) = 45.2 days

Days sales in inventory = Ending inventory ÷(Cost of goods sold/365)

= $ 750000 ÷($ 4250000/365) = 64.4 days

Days take to realize cash from ending inventory = 45.2 days + 64.4 days = 109.6 days.

answered by: anonymous