Question

Income statement data: Sales $ 5,000 Cost of goods sold 4,200 Balance sheet data: Inventory $ 550 Accounts receivable 110 Accounts payable 270 Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the above firm: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 1 decimal place.) a. Accounts receivable period days b. Accounts payable period days c. Inventory period days d. Cash conversion cycle days

Answer 1

Answer:

A. Accounts receivable period days = 8.0 days

B. Accounts payable period days = 23.4 days

C. Inventory period days = 48.0 days

D. Cash conversion cycle = 32.6 days

Explanation:

A. We know,

Accounts receivable period days = $\frac{365}{Accounts receivable turnover}$

Accounts receivable turnover = $\frac{Net sales}{Average accounts receivable}$

Given,

Sales  = $5,000

Accounts receivable = $110

As, there is no beginning balance of accounts receivable, the normal balance of accounts receivable will be treated as average accounts receivable.

Therefore, Accounts receivable turnover = $\frac{5,000}{110}$

Accounts receivable turnover = 45.5 times

Again, Accounts receivable period days = $\frac{365}{45.5}$

Accounts receivable period days = 8.0 days

B. We know,

Accounts payable period days = $\frac{365}{Accounts payable turnover}$

Again, to determine accounts payable period days, we have to find accounts payable turnover.

Accounts payable turnover = $\frac{Purchases}{Average accounts payable}$

As there is no purchase, cost of goods sold will be used to determine the payable turnover. Moreover, there is no beginning balance of accounts payable, we will use ending accounts payable as average payable.

Given,

Purchase (Cost of goods sold) = $4,200

Accounts payable = $270

Accounts payable turnover = $\frac{4,200}{270}$

Accounts payable turnover = 15.6 times

Therefore, Accounts payable period days = $\frac{365}{15.6}$

Accounts payable period days = 23.4 days

C. We know,

Inventory period days = $\frac{365}{Inventory turnover}$

To determine inventory period days, we have to find inventory turnover.

Inventory turnover = $\frac{Cost of goods sold}{Average Inventory}$

As there is no beginning balance of inventory, we will use ending inventory as average inventory.

Inventory turnover = $\frac{4,200}{550}$

Inventory turnover = 7.6 times

Therefore, Inventory period days = $\frac{365}{7.6}$

Inventory period days = 48.0 days

D. We know,

Cash conversion cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

Here, Days Payable Outstanding = Accounts payable period days = 23.4 days

Days Inventory Outstanding = Inventory period days = 48.0 days

Days Sales Outstanding = Accounts receivable period days = 8.0 days

Putting the value in the formula, we can get,

Cash conversion cycle = 8.0 + 48.0 - 23.4 days

Cash conversion cycle = 32.6 days