Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the following firm:
Income statement data:
Sales 5,000
Cost of goods sold 4,200
Balance Sheet Data:
Beginning of Year End of Year
Inventory 500 600
Accounts Receivable 100 120
Accounts Payable 250 290
To calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle, we need to use the following formulas:
1. Accounts Receivable Period = (Average Accounts Receivable / Sales) * 365
2. Accounts Payable Period = (Average Accounts Payable / Cost of Goods Sold) * 365
3. Inventory Period = (Average Inventory / Cost of Goods Sold) * 365
4. Cash Conversion Cycle = Inventory Period + Accounts Receivable Period - Accounts Payable Period
First, let's calculate the average values for accounts receivable, accounts payable, and inventory:
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
= (100 + 120) / 2
= 110
Average Accounts Payable = (Beginning Accounts Payable + Ending Accounts Payable) / 2
= (250 + 290) / 2
= 270
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
= (500 + 600) / 2
= 550
Now, we can calculate the individual periods:
1. Accounts Receivable Period = (Average Accounts Receivable / Sales) * 365
= (110 / 5000) * 365
= 8.03 days
2. Accounts Payable Period = (Average Accounts Payable / Cost of Goods Sold) * 365
= (270 / 4200) * 365
= 23.47 days
3. Inventory Period = (Average Inventory / Cost of Goods Sold) * 365
= (550 / 4200) * 365
= 47.98 days
Finally, we can calculate the cash conversion cycle:
Cash Conversion Cycle = Inventory Period + Accounts Receivable Period - Accounts Payable Period
= 47.98 + 8.03 - 23.47
= 32.54 days
Therefore, the accounts receivable period is 8.03 days, the accounts payable period is 23.47 days, the inventory period is 47.98 days, and the cash conversion cycle is 32.54 days.
To calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the firm, we need to use the following formulas:
Accounts Receivable Period = (Accounts Receivable / Sales) * 365
Accounts Payable Period = (Accounts Payable / Cost of Goods Sold) * 365
Inventory Period = (Average Inventory / Cost of Goods Sold) * 365
Cash Conversion Cycle = Inventory Period + Accounts Receivable Period - Accounts Payable Period
Let's calculate each of these step by step:
1. Accounts Receivable Period:
Accounts Receivable at the beginning of the year = $100
Accounts Receivable at the end of the year = $120
Sales = $5,000
Average Accounts Receivable = (Accounts Receivable at the beginning of the year + Accounts Receivable at the end of the year) / 2 = ($100 + $120) / 2 = $110
Accounts Receivable Period = (Average Accounts Receivable / Sales) * 365 = ($110 / $5,000) * 365 ≈ 8.03 days
Therefore, the accounts receivable period for the firm is approximately 8.03 days.
2. Accounts Payable Period:
Accounts Payable at the beginning of the year = $250
Accounts Payable at the end of the year = $290
Cost of Goods Sold = $4,200
Average Accounts Payable = (Accounts Payable at the beginning of the year + Accounts Payable at the end of the year) / 2 = ($250 + $290) / 2 = $270
Accounts Payable Period = (Average Accounts Payable / Cost of Goods Sold) * 365 = ($270 / $4,200) * 365 ≈ 23.37 days
Therefore, the accounts payable period for the firm is approximately 23.37 days.
3. Inventory Period:
Inventory at the beginning of the year = $500
Inventory at the end of the year = $600
Cost of Goods Sold = $4,200
Average Inventory = (Inventory at the beginning of the year + Inventory at the end of the year) / 2 = ($500 + $600) / 2 = $550
Inventory Period = (Average Inventory / Cost of Goods Sold) * 365 = ($550 / $4,200) * 365 ≈ 47.62 days
Therefore, the inventory period for the firm is approximately 47.62 days.
4. Cash Conversion Cycle:
Cash Conversion Cycle = Inventory Period + Accounts Receivable Period - Accounts Payable Period = 47.62 + 8.03 - 23.37 ≈ 32.28 days
Therefore, the cash conversion cycle for the firm is approximately 32.28 days.
In summary, the accounts receivable period is approximately 8.03 days, the accounts payable period is approximately 23.37 days, the inventory period is approximately 47.62 days, and the cash conversion cycle is approximately 32.28 days for the given firm.