Question

Timothy Johnson. has annual sales of $200,000, cost of goods sold of $150,000, average inventories of $2,500, average accounts receivable of $20,000, and an average accounts payable balance of $5,000. Assuming that all sales are on credit, what will be the firm’s cash cycle?

Answer 1

Cash Cycle = Days of Inventory Outstanding + Days of Sales Outstanding - Days of Payable outstanding

Days of Inventory Outstanding = (Avg Inventory / Cost Of Goods Sold) * 365

= (2500 / 150,000) * 365

= 6.0833

Days of Sales Outstanding = (Avg Accounts Receivable / Annual sales) * 365

= (20,000 / 200,000) * 365

= 36.5

Days of Payable outstanding = (Avg Accounts Payable / Cost of Goods Sold) * 365

= ( 5,000 / 150,000) * 365

= 12.1667

Cash Cycle = 6.0833 + 36.5 - 12.1667

= 30.4166

The cash cycle is 30.4166 Days

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