Young's had a beginning accounts payable balance of $42,900 and an ending accounts payable balance of $44,800. Sales for the period were $770,000 and costs of goods sold were $598,000. If the operating cycle is 129 days, how long is the firm's cash cycle
The cash cycle can be calculated as:
Cash cycle = Operating cycle - Accounts payable deferral period
To find the accounts payable deferral period, we first need to calculate the average accounts payable balance:
Average accounts payable = (Beginning accounts payable + Ending accounts payable) / 2
Average accounts payable = ($42,900 + $44,800) / 2 = $43,850
The accounts payable deferral period can be found by dividing the average accounts payable by the daily cost of goods sold:
Accounts payable deferral period = Average accounts payable / Daily cost of goods sold
Daily cost of goods sold = Annual cost of goods sold / 365
Annual cost of goods sold = $598,000
Daily cost of goods sold = $598,000 / 365 = $1,636.99
Accounts payable deferral period = $43,850 / $1,636.99 = 26.78 days
Now we can calculate the cash cycle:
Cash cycle = Operating cycle - Accounts payable deferral period
Cash cycle = 129 days - 26.78 days
Cash cycle = 102.22 days
Therefore, the firm's cash cycle is 102.22 days.
To calculate the cash cycle, we need to subtract the payable period from the operating cycle.
Step 1: Calculate the payable period.
Payable period = Ending accounts payable balance - Beginning accounts payable balance
Payable period = $44,800 - $42,900
Payable period = $1,900
Step 2: Calculate the cash cycle.
Cash cycle = Operating cycle - Payable period
Cash cycle = 129 days - $1,900
Therefore, the firm's cash cycle is 129 days.