a. The Flamingo Corporation is trying to determine the effect of its inventory t
ID: 2784113 • Letter: A
Question
a. The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash flow cycle. Last year, the company’s sales (all on credit) were $180,000 and it COGS were 85% of the sales. Inventory was turned around 8 times during the year and accounts receivable turnover was 10. Flamingo’s payables deferral period was 30 days. Calculate CCC. Compute the average balances in accounts receivables, accounts payable and inventory.
b. Interpret and analyze the CCC for this company. Why is CCC important?
Explanation / Answer
Payables days = 365 / Payables turn over
Payables days = 365 / (COGS / accounts payable)
30 = 365 / (0.85*180000 / accounts payable)
accounts payable = 30 * 0.85*180000 / 365 = 12575.34
Receivables turnover = 10
Receivables days = 365 / Receivables turn over
= 365 / 10 = 36.5
Sales / Accounts Receivables = 10
Accounts Receivables = 180000/10 = 18000
Inventory turnover = 8
Inventory = COGS / Inventory turnover = 0.85*180000 / 8 = 19125
Inventory days = 365 / Inventory turn over
= 365 / 8 = 45.625
CCC = Inventory days + Receivables days - Payable days
= 45.625 + 36.5 - 30 = 52.125 days
CCC is important because it measure of company operational cashflow, it measures liquidity
Current 52.125 days is average ( actually it depends on industry)
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