Question

Suppose that Freddie's Fries has annual sales of $650,000; cost of goods sold of $525,000; average inventories of $24,000; average accounts receivable of $40,000, and an average accounts payable balance of $35,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle? (Round your answer to 2 decimal places.

Answer 1

14.81 days

Step-by-step explanation:

The computation of the cash cycle is shown below:

The cash cycle = Days inventory outstanding + days sale outstanding - days payable outstanding

where,

Day inventory outstanding = (Beginning inventory + ending inventory) ÷ cost of goods sold × number of days in a year

= ($24,000 ÷ $525,000) × 365 days

= 16.68 days

Day sale outstanding = (Beginning Accounts receivable + ending Accounts receivable) ÷ Net sales × number of days in a year

= ($40,000 ÷ $650,000) × 365 days

= 22.46 days

And, Day payable outstanding = (Beginning Accounts payable + ending Accounts payable) ÷ cost of goods sold × number of days in a year

= ($35,000 ÷ $525,000) × 365 days

= 24.33 days

Now put these days to the above formula

So, the days would equal to

= 16.68 days + 22.46 days - 24.33 days

= 14.81 days