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Operating Cycle

The Garcia Industries balance sheet and income statement for the year 2006 are as follows:
Assets Liabilities and Stockholder's Equity
Cash $6.0 Account payable $10.0
Account receivables $14.0 Salaries, benefits, and payroll
taxes payable $2.0
Inventories $12.0 Othe current liabilities $10.0
Fixed assets, net $40.0 Long-term debt $38.0

$72 Stockholder's equity $72.0

*The average inventory over the past 2 years also equals $12.0 million.

Income statement(in million of dollars)
Net sales $100.0
Cost of Sales $60.0
Selling general and administrative expenses $20.0
Other expenses $15.0
Net income $5.0

a- Determine the length of the inventory conversion period.
b- Determine the length of the receivables conversion period.
c- Determine the length of the operating cycle.
d- Determine the length of the payables deferral period.
e- Determine the length of the cash conversion cycle.
f- What is the meaning of the number you calculated in (e)?

Solution Preview

Operating Cycle is defined as the time duration, which the firm requires to manufacture and sell the product and collect cash. Thus operating cycle refers to the acquisition of resources, conversion of raw materials into work-in-process into finished goods, conversion of finished goods into sales and collection of sales.

Larger is the operating cycle, larger will be the investment in current assets.

In practice, firms are acquiring ...

Solution Summary

This explains the steps to compute the Operating Cycle