1. Consider the following financial statement information for the Windbag Balloo

Question

1.Consider the following financial statement information for the Windbag Balloon Corporation:

              Item                                      Beginning of 2016      Ending of 2016

            Inventory                                 $4,925                         $5,150

            Accounts receivable                $3,019                         $3,380

            Accounts payable                    $7,516                         $7,952

            Net sales                                              $47,115

            Cost of goods sold                              $22,893

(1) Calculate the operating and cash cycles. How do you interpret your answer?

(Use the average Inventory, A/R and A/P for 2016 to calculate the cycles)

(2) In general, will shortening cash cycle increase a firm’s profitability? Why?

Explanation / Answer

a) Operating cycle or cash conversion cycle= DIO+DSO-DPO DIO= Days inventory outstanding= (Average Inventory/ Cost of sales )*365 DSO= Days sales outstanding= (Average receivables/ Net credit sales)*365 DPO=Days payable outstanding=(Average accounts payable/Cost of sales)*365 DIO         80.32 Days DSO         24.79 Days DPO      123.31 Days Operating cycle or cash conversion cycle= 80.32+24.79-123.31= -18.2 days Windbag is able to recover money from customer faster and paying late to its suppliers. b) Yes, It can free up resources stuck up in accounts receivables and inventory that can be better utilised for other productive work.

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