Question

The following company has the following data

1- Income ststement
Net sales Revenu=120000
Cost of goods sold=70000
2-Balance sheet
Beginning Inventory =25000
Ending Inventory =18000
Account Receivable= 6500
Account Payable =10500

Question:
calculate the Cash Gap and illustrate:
1) If the suppliers need to be paid after 40 days, is the company need a source of finance? If yes, the facilities needed to cover how many days?
2) How the company can cover the Gap?
3) What is the point of strength and weakness in the company operating cycle?

Answer 1

The cash gap is the time interval between the date when a company pays cash to its suppliers for inventory and the date it receives cash from its customers. It can be calculated as Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) - Days Payable Outstanding (DPO).

Based on the information you provided, we can calculate DIO and DPO but not DSO since we don't have information about the company's average accounts receivable.

DIO = ((Beginning Inventory + Ending Inventory) / 2) / (Cost of Goods Sold / 365)

DIO = ((25000 + 18000) / 2) / (70000 / 365)

DIO ≈ 105.36 days

DPO = (Accounts Payable / Cost of Goods Sold) * 365

DPO = (10500 / 70000) * 365

DPO ≈ 54.64 days

• Without knowing DSO, we cannot accurately calculate the cash gap or determine if the company needs a source of finance.

• To cover the cash gap, a company can speed up collections from customers, negotiate longer payment terms with suppliers or use short-term financing such as a line of credit.

• As for strengths and weaknesses in the company's operating cycle, it's difficult to determine without more information about industry standards and other factors that may affect their operations.