Question

Consider the following financial statement information for the Zamboni Icers Corporation:

Item:                           Beginning:               Ending:

Inventory.                    $11,800.                   $12,800
Accounts Rec.             $6,800.                     $7,100
Accounts Pay.             $9,000.                     $9,400
Net Sales.                                $98,000
Cost of goods sold.              $78,000

All sales are on credit.

Calculate the operating and cash cycles.

Operating cycle.     ?days
Cash cycle.              ?days

Answer 1

- Days Inventory Outstanding (DIO) = (Average Inventory/COGS)*365 days

Average Inventory = ($11,800 + $12,800)/2

=$12,300

DIO = ($12,300/$78,000)*365

= 55.56 days

- Days sales Outstanding(DSO) = (Average Accounts Receivables/Net Sales)*365

Average Accounts Receivables = ($6800 + $7100)/2

=$6950   

DSO = ($6,950/$98,000)*365

= 25.89 days

- Days Payable Outstanding (DPO) = (Average Accounts Payable/COGS)*365

Average Accounts Payable =($9000 + $9400)/2

=$9200

DPO = ($9200/$78,000)*365

= 43.05 days

a). Operating Cycle = Days Inventory Outstanding + Days sales Outstanding(DSO)

=55.56 + 25.89

=81.45 days

b). Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding(DSO) - Days Payable Outstanding(DPO)

= 55.56 + 25.89 - 43.05

= 38.40 days