Question

Calculate the Cash Cycle using the following information. (Assume 360 days in a year). Opening Balances Raw Material 4,00,000 WIP 80,000 Finished Goods 6,00,000 Debtors 2,50,000 Creditors 5,60,000 Closing Balances Raw Material 5,00,000 WIP 70,000 Finished Goods 7,25,000 Debtors 3,15,000 Creditors 6,25,000 Costs Incurred during the year Manufacturing Costs 10,45,000 Excise Duty 8,50,000 Selling and Distribution Expenses 4,20,000 Admin. Overheads 3,00,000 Total Sales 4,20,00,500 Total Purchases 3,23,00,000 30% of sales are on credit and 80% of purchases are on credit

Answer 1

156.76 days (approx.)

Explanation:

To calculate the Cash Cycle, we need to consider the time it takes for a company to convert its investment in inventory and receivables back into cash. The formula for Cash Cycle is as follows:

Cash Cycle = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

Now, let's calculate each component of the Cash Cycle using the given information.

1. Inventory Conversion Period:

Inventory Conversion Period measures the average number of days it takes to convert raw materials into finished goods.

Average Inventory = (Opening Raw Material + Closing Raw Material) / 2

= (4,00,000 + 5,00,000) / 2

= 4,50,000

Manufacturing Costs per day = Manufacturing Costs / 360 days

= 10,45,000 / 360

= 2,902.77 (approx.)

Inventory Conversion Period = Average Inventory / Manufacturing Costs per day

= 4,50,000 / 2,902.77

≈ 155 days

2. Receivables Collection Period:

Receivables Collection Period measures the average number of days it takes to collect payments from customers.

Average Receivables = (Opening Debtors + Closing Debtors) / 2

= (2,50,000 + 3,15,000) / 2

= 2,82,500

Sales per day = Total Sales / 360 days

= 4,20,00,500 / 360

= 1,16,666.67 (approx.)

Receivables Collection Period = Average Receivables / Sales per day

= 2,82,500 / 1,16,666.67

≈ 2.42 days

3. Payables Deferral Period:

Payables Deferral Period measures the average number of days the company takes to pay its suppliers.

Average Payables = (Opening Creditors + Closing Creditors) / 2

= (5,60,000 + 6,25,000) / 2

= 5,92,500

Purchases per day = Total Purchases / 360 days

= 3,23,00,000 / 360

= 8,97,222.22 (approx.)

Payables Deferral Period = Average Payables / Purchases per day

= 5,92,500 / 8,97,222.22

≈ 0.66 days

Now, we can calculate the Cash Cycle using the formula mentioned earlier:

Cash Cycle = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

= 155 days + 2.42 days - 0.66 days

≈ 156.76 days (approx.)

Therefore, the Cash Cycle is approximately 156.76 days based on the given information.