This Is Not A Paper And Is Only Worth 20 Points For Mechapte

This Is Not A Paper And Is Only Worth 20 Points For Mechapter 15p11pr

This is not a paper and is only worth 20 points for me. Chapter 15 P Pretty Lady Cosmetic Products has an average production process time of 40 days. Finished goods are kept on hand for an average of 15 days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives 40 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?

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?

Paper For Above instruction

The short-term operating cycle, also known as the cash conversion cycle, is a key financial metric that measures the time span between the firm’s outlay of cash for purchases and the receipt of cash from sales. It provides pivotal insight into the company's liquidity and efficiency in managing working capital. Calculating this cycle involves summing the days inventory outstanding (DIO) and days sales outstanding (DSO), then subtracting the days payable outstanding (DPO).

a. Estimating the firm's short-term operating cycle

To determine the operating cycle, we start by calculating each component based on the provided data:

• Days Inventory Outstanding (DIO): This is the average number of days the firm holds inventory before selling it. Given as 15 days.
• Days Sales Outstanding (DSO): This indicates how long it takes to collect accounts receivable. Given as 35 days.
• Days Payable Outstanding (DPO): This is the average number of days the firm takes to pay its suppliers. Given as 40 days.

Using these, the short-term operating cycle (also known as the cash conversion cycle) can be calculated as:

Operating Cycle = DIO + DSO

Substituting the known values:

Operating Cycle = 15 days + 35 days = 50 days

This indicates the firm’s inventory and receivables are converted into cash approximately every 50 days.

To find out how often the cycle turns over within a year, the number of cycles per year is calculated as:

Number of cycles = 365 days / Operating cycle

Putting in the numbers:

Number of cycles = 365 / 50 ≈ 7.3 times per year

This means the firm's operating cycle completes about 7.3 times annually, reflecting the frequency of converting inventory and receivables into cash.

b. Determining investment and net financing needs

Next, with the assumed figures of net sales of $1,200,000 and a cost of goods sold (COGS) of $900,000, the focus shifts to calculating the average investments in accounts receivable, inventories, and accounts payable, along with the net financing requirement.

i. Average accounts receivable

Using the receivables turnover ratio, we find the average accounts receivable as follows:

Receivables Turnover Ratio = Net Sales / Accounts Receivable

Rearranged to find average accounts receivable:

Accounts Receivable = Net Sales / Receivables Turnover Ratio

Assuming the receivables turnover is consistent with days sales outstanding:

Receivables Turnover = 365 / DSO = 365 / 35 ≈ 10.43

Therefore,:

Accounts Receivable = $1,200,000 / 10.43 ≈ $114,885

ii. Average inventory investment

Inventory investment is computed considering the inventory turnover ratio:

Inventory Turnover = COGS / Average Inventory

Rearranged:

Average Inventory = COGS / Inventory Turnover

Similarly, based on DIO:

Inventory Turnover = 365 / DIO = 365 / 15 ≈ 24.33

Thus,:

Average Inventory = $900,000 / 24.33 ≈ $36,995

iii. Average accounts payable

Accounts payable can be approximated using the payable turnover ratio:

Payables Turnover = COGS / Accounts Payable

Rearranged:

Accounts Payable = COGS / Payables Turnover

Based on DPO:

Payables Turnover = 365 / DPO = 365 / 40 ≈ 9.13

Therefore:

Accounts Payable = $900,000 / 9.13 ≈ $98,541

Finally, the net financing need is computed as the total investment in receivables and inventory minus the accounts payable, which effectively represents working capital tied up in these accounts:

Net Working Capital = (Accounts Receivable + Inventory) – Accounts Payable

Substituting values:

Net Working Capital = ($114,885 + $36,995) – $98,541 ≈ $53,339

This figure indicates the amount of external financing the firm requires to support its short-term operating activities, assuming it only considers receivables, inventories, and payables.

Conclusion

The firm's short-term operating cycle of approximately 50 days indicates a moderate speed in converting inventory and receivables into cash, with a turnover about 7.3 times annually. The estimated net working capital requirement of around $53,339 suggests the firm must secure this amount in financing to sustain its operational cycle focusing solely on receivables, inventories, and payables.

References

• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
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