Pretty Lady cosmetic products has an average production process time of forty da

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

Operating Cycle = Days Inventory Outstanding + Days Sales Outstanding + Days Payable Outstanding

Operating Cycle = 15 + 35 + 40 = 90

Turn over = 365 / 90 ~ 4 times

Average Investment in Accounts Receivables = Net Sales / (Receivables Turnover*2)

= $1,200,000 / (365/35 * 2) = $57,534

Average Investment in Inventories = Cost of Goods Sold / (Inventories Turnover*2)

= $900,000 / (365/15 * 2) = $18,493

Average Investment in Payables = Cost of Goods Sold / (Payables Turnover*2)

= $900,000 / (365/40 * 2) = $49,315

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