The Garecia industries balance sheet and income statement for the year ended 201
ID: 2632034 • Letter: T
Question
The Garecia industries balance sheet and income statement for the year ended 2012 are as follows.
Balance Sheet (in Millions of Dollars)
Assets
Liabilities and Stockholders Equity
Cash
6.0
Accounts payable
10.0
Accounts receivable
14.0
Salaries, benefits, and payroll taxes payable
2.0
Inventories*
12
Other current liabilities
10
Fixed assets, net
40
Long-term
12
72
Stockholders equity
38
72.0
*The average inventory over the past two years also equals $12.0 years
Income Statement ( in Millions of Dollars)
Net sales
100.00
Cost of sales
60.0
Selling, general, and administrative expenses
20.0
Other expenses
15.0
Earnings after tax
5.0
Determine the length of the inventory conversion period
Determine the length of the receivables conversion period.
Determine the length of the operating cycle.
Determine the length of the payables deferral period.
Determine the length of the cash conversion cycle.
What is the meaning of the number you calculated in part e?
Balance Sheet (in Millions of Dollars)
Assets
Liabilities and Stockholders Equity
Cash
6.0
Accounts payable
10.0
Accounts receivable
14.0
Salaries, benefits, and payroll taxes payable
2.0
Inventories*
12
Other current liabilities
10
Fixed assets, net
40
Long-term
12
72
Stockholders equity
38
72.0
Explanation / Answer
(a) Inventory conversion period = $12 / ($60/365) = 73.0 days
(b) Receivables conversion period = $14 / ($100/365) = 51.1 days
(c) Operating cycle = 73.0 days + 51.1 days = 124.1 days
(d) Payables deferral period = ($10)/[($60)/365] =60.8 days
(e) Cash conversion cycle = 124.1 days
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