Chapter 15: P1

1.      Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives forty days of credit on its purchases from suppliers.

a.      Estimate the average length of the firm’s short-term operating cycle. How often would the cycle turn over in a year?

·   Cash conversion cycle CCC = DIO + DSO – DPO

·   CCC = 15+35-40 = 10 days

·   Operating cycle CC starts from the day the firm raw material for production till realization of sales.

·   So OC = 40+15+35-40 = 50 days

b.      Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?