Please Show All Work For This Assignment And Explain Your De
Please Show All Work For This Assignment And Explain Your Derivations
Please show all work for this assignment and explain your derivations. Lack of step-by-step work will not be credited. Partial credit will be given for step-by-step descriptions of answers. Calculation: In the month of January, Reliance® Auto sold 60 vehicles and had an account receivable of $160,000.00. If a vehicle costs $40,000, accounts payable is $240,000, and the cost of sales is 72%, with the current value of total inventory at $500,000.00, calculate the following:
- The average daily sales
- The average days of accounts receivable
- The average daily cost of sales
- The average days of inventory
- Cash-to-cash cycle time
Please upload a Word document using APA format for this assignment, including a title page and a references page. All derivations, analysis, and explanations must be shown where applicable. Use in-text citations, references, and appropriate formatting, such as font size and double spacing. The assignment will be graded based on content accuracy and clarity.
Paper For Above instruction
Introduction
Understanding the operating cycle of an automotive business like Reliance® Auto is essential for assessing its liquidity and operational efficiency. The calculation of key financial metrics such as average daily sales, days sales outstanding, average daily cost of sales, inventory days, and cash-to-cash cycle time offers insights into how effectively a company manages its receivables, inventory, and payables. This paper demonstrates the process for calculating these metrics based on provided data, emphasizing the importance of detailed derivations and explanations to support financial analysis.
Data and Assumptions
The following data from Reliance® Auto's January transactions serve as the basis for calculations:
- Total vehicles sold: 60 vehicles
- Account receivable: $160,000
- Vehicle cost: $40,000 per vehicle
- Accounts payable: $240,000
- Cost of sales: 72% of sales
- Total inventory: $500,000
The calculations assume that all transactions occurred uniformly over the month, and that sales are consistent enough for daily averages to be meaningful.
1. Average Daily Sales
The average daily sales are calculated by dividing total sales revenue by the number of days in the period. Since the question involves vehicle sales and cost data, we need to determine the total sales revenue first.
The total revenue from vehicle sales:
\[
\text{Total sales} = \text{Number of vehicles sold} \times \text{Price per vehicle} = 60 \times \$40,000 = \$2,400,000
\]
Assuming the month of January has 31 days, the average daily sales are:
\[
\text{Average daily sales} = \frac{\$2,400,000}{31} \approx \$77,419.35
\]
This metric reflects the company's typical daily revenue from vehicle sales.
2. Average Days of Accounts Receivable
This metric indicates how long, on average, it takes for the company to collect receivables.
\[
\text{Average days receivable} = \frac{\text{Accounts receivable}}{\text{Average daily sales}} = \frac{\$160,000}{\$77,419.35} \approx 2.07 \text{ days}
\]
This quick turnover suggests efficient collection practices, although this depends on standard industry periods.
3. Average Daily Cost of Sales
The cost of sales (COS) is 72% of total sales:
\[
\text{Cost of sales} = 0.72 \times \$2,400,000 = \$1,728,000
\]
Average daily cost of sales:
\[
\text{Average daily COS} = \frac{\$1,728,000}{31} \approx \$55,741.94
\]
This figure helps in assessing daily expenses related to inventory movement.
4. Average Days of Inventory
The average number of days the inventory is held before sale:
\[
\text{Days of inventory} = \frac{\text{Total inventory}}{\text{Average daily COS}} = \frac{\$500,000}{\$55,741.94} \approx 8.97 \text{ days}
\]
A shorter period indicates efficient inventory turnover.
5. Cash-to-Cash Cycle Time
The cash cycle is calculated as:
\[
\text{Cash conversion cycle} = \text{Days of inventory} + \text{Days of receivables} - \text{Days of payables}
\]
Given accounts payable:
\[
\text{Days of payables} = \frac{\text{Accounts payable}}{\text{Average daily COS}} = \frac{\$240,000}{\$55,741.94} \approx 4.30 \text{ days}
\]
Thus, the cash-to-cash cycle:
\[
\text{Cycle time} = 8.97 + 2.07 - 4.30 \approx 6.74 \text{ days}
\]
This duration indicates how quickly the company can convert its investments in inventory and receivables into cash.
Conclusion
The derived financial metrics portray Reliance® Auto's operational efficiency during January. The company demonstrates effective receivables management with a collection period of approximately two days. Its inventory turnover is also prompt, with inventory held for roughly nine days, and a short cash cycle of around six to seven days indicates strong liquidity positions. These insights assist management in strategic planning and highlight areas for potential improvement, such as inventory management or extending payables without compromising supplier relationships.
References
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- Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of Financial Management. Pearson Education.
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