Question

Clay’s Forging at Canal Fulton wants to determine its inventory management performance during its past year of operations. Refer to the following information provided by the company: Inventory on hand at beginning of the year = $273,000 Inventory on hand at end of the year = $290,000 Annual cost of goods sold = $1,790,000 Average annual accounts receivable = $45,500 Annual credit sales = $102,000 Beginning-of-year accounts payable = $227,500 End-of-year accounts payable = $316,200 Total annual purchases = $1,575,000 Based on the above information, calculate the cash-to-cash cycle time (CCCT).

Answer 1

Answer:

days on inventory 57 + collection cycle 163- payment cycle 63

CCCT = 157 days

Explanation:

The cash-to-cash measures the times from the company paid his good from the time it collect from the customer:

days inventory outstanding + collection cycle - payment cycle

days inventory outstanding:

$\frac{365}{Inventory TO} = Days on Inventory$

Where:

$\frac{COGS}{Average Inventory} = Inventory Turnover$

​where:

$Average Inventory=(Beginning Inventory + Ending Inventory)/2$

COGS                         $ 1,790,000

Beginning Inventory: $    273,000

Ending Inventory:      $   290,000

Average Inventory:   $     281,500

$\frac{1790000}{281500} = Inventory Turnover$

Inventory TO 6.358792185

$\frac{365}{6.35879218472469} = Days on Inventory$

Days on Inventory 57

Collection cycle:

$\frac{Sales}{Average AP} = AP Turnover$

​where:

$Average AP=(Beginning AP+ Ending AP)/2$

Purchases:      1,575,000

Beginning AP:   227,500

Ending AP:         316,200

Average AP:      271,850

$\frac{1575000}{271850} = AP Turnover$

$\frac{365}{AP TO} = payment cycle$

AP TO 5.793636196

payment cycle 63

Collection cycle

$\frac{Sales}{Average AR} = AR Turnover$

Sales 102,000

Average AR 45,500

$\frac{102000}{45500} = AR Turnover$

$\frac{365}{AR TO} = collection cycle$

AR TO 2.241758242

$\frac{365}{2.24175824175824} = collection cycle$

collection cycle 163