week 12 1. Pretty Lady Cosmetic Products has an average production process time
ID: 2665935 • Letter: W
Question
week 121. 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 needs considering only these three
accounts?
Explanation / Answer
cash conversion cycle CCC = DIO + DSO - DPO ie CCC = 15+35-40 = 10 days Operating cycle CC starts from the day the firm rx raw material for production till realization of sales. So OC = 40+15+35-40 = 50 days.....Ans (A) Annual Sales = $1200,000 COGS = $900,000 Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is, the better. DIO = Average inventory/COGS per day = Average inventory/($900,000/365) = 15days So Average inventory = $36,986.30 Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Again, smaller is better. DSO = Average AR / Revenue per day = Average AR/($1200,000/365) =35 days So Average AR = $115,068.50 Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If this can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a longer DPO is better. DPO = Average AP / COGS per day = Average AP/($900,000/365) =40 days So Average AP = $98,630.14 So net financing needs = Avge Inv + Avge A/R - Avge A/P = 36986.30+115068.50-98630.14 = $53,424.66
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