Question

# Sales (all credit): \$6,000,000; Cost of Goods Sold: 80% of Sales; Accounts receivable: \$350,000; Inventory: \$600,000;...

Sales (all credit): \$6,000,000; Cost of Goods Sold: 80% of Sales; Accounts receivable: \$350,000; Inventory: \$600,000; Accounts payable: \$150,000 What is the expected working capital financing requirement based on the working capital cycle? Use 1 year = 365 days

 \$736,438 \$756,164 \$604,932 \$920,548

The correct answer is last option \$ 920,548

Credit Sales, S = \$ 6,000,000

Cost of goods sold, COGS = 80% x S = 80% x 6,000,000 = \$ 4,800,000

Accounts receivable, AR = \$ 350,000; Inventory, I = \$ 600,000; Accounts payable, AP = \$ 150,000; Use 1 year = 365 days

Days in receivables = AR / S x 365 = 350,000 / 6,000,000 x 365 =  21 days

Inventory days = I / COGS x 365 = 600,000 / 4,800,000 x 365 =  46 days

Days to payment = AP / COGS x 365 = 150,000 / 4,800,000 x 365 = 11 days

Hence, working capital cycle in days = Days in receivables + Inventory days - Days to payment = 21 + 46 - 11 = 56 days

Hence, the expected working capital financing requirement based on the working capital cycle = 56 days of sales = 56 / 365 x S = 56 / 365 x 6,000,000 = \$ 920,548

Hence, the correct answer is last option \$ 920,548.

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