Question

Pretty lady cosmetic products has an average production process time of 40 days. Finished goods are kept on hand for an average of 15 days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives 40 days of credit on its purchases from suppliers. Assume sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts

Answer 1

Based on the sales, cost of goods, and days on average, the average investment of Pretty Lady Cosmetics is:

• Average Receivables - $115,068.50.
• Average Inventories - $36,986.30.
• Average payables - $96,630.14.
• Net financing needs - $53,424.66.

What are the average investments for Pretty Lady Cosmetic Products?

The Average Receivables are:

40 days = Average AR ÷ (1,200,000/365)

= $115,068.50

The Average Inventories:

15 days =  Average inventory ÷ COGS per day

15 =  Average inventory  ÷ (900,000 / 365)

= $36,986.30

The Average payables:

40 days = Average payables ÷  COGS per day

40 = Average payables ÷  (900,000 / 365)

Average payables = $98,630.14

Net financing needs:

= Average Inventories + Average Receivables -  Average payables

= 115,068.50 + 36,986.30 - 98,630.14

= $53,424.66

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