Pretty Lady Cosmetic Products has an average production process time of forty da
ID: 2475039 • Letter: P
Question
Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives forty days of credit on its purchases from suppliers.
a. Estimate the average length of the firm’s short-term operating cycle. How often would the cycle turn over in a year?
b. Assume net 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?
Explanation / Answer
Average Inventory period = 40+15 =55 days
Accounts receivables period = 35 days
Accounts payable period = 40 days
a) Operating cycle = Average Inventory period+ Accounts receivables period- Accounts payable period
= 55 days + 35 days -40 days
= 50 days
b) Average Investment in Accounts receivable = Sales x AR period/ 365
= 1200,000 x 35/365
= 115068
Average Investment in Inventory = COGS x Inventory period/ 365
= 900,000 x 55/365
= 135,616
Accounts payable = COGS x AP period/ 365
= 900,000 x 40/365
= 98630
Total Investment required = 115068 + 135,616 -98630
= 152,054
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