Comments
This is an opportunity to work with Accounts Receivable, Inventory, and Accounts Payable. These
notions are from about pages 194 to 197. With any problem statement we operate with whatever data
is given. While the ideal would be that sales is subdivided between credit sales and cash sales, like in
this problem, if we only have total sales, then we use total sales in the accounts receivable turnover.
Also, feel free to use years of 360 rather than 365. That should never make a difference in the right-ness
or wrong-ness of your response.
Accounts Receivable Turnover = Net credit sales / Average accounts receivable
Days Accounts Receivable outstanding = 365 / Accounts Receivable Turnover
Inventory Turnover = Cost of goods sold / Average inventory
Days Inventory held = 365 / Inventory Turnover
Accounts Payable Turnover = Inventory Purchases / Average accounts payable
Days Accounts Payable outstanding = 365 / Accounts payable turnover
Operating cycle = Days in receivables + Days in inventory
You can see that the operating cycle is the time from purchase of inventory from the vendor to
collection of cash from the customer.
Cash conversion cycle = operating cycle – days accounts payable outstanding
Problem Statement
Selected data of Islander Company follow:
As of December 31, 2022 2021 Accounts receivable $500,000 $470,000 Allowance for doubtful accounts <25,000 > <20,000 > Net accounts receivable $475,000 $450,000 Inventories – lower of cost or market $600,000 $550,000 Accounts payable $400,000 $360,000 Year Ended December 31, 2022 2021 Net credit sales $2,500,000 $2,200,000 Net cash sales 500,000 400,000 Net sales $3,000,000 $2,600,000 Cost of goods sold $2,200,000 $1,800,000 Selling, general, and administrative expenses 300,000 270,000 Other 50,000 30,000 Total operating expenses $2,350,000 $2,100,000
Required:
1. What is the Accounts Receivable Turnover?
2. What is the Days Accounts Receivable Outstanding?
3. What is the Inventory Turnover?
4. What is the Days Inventory held?
5. What is the Accounts Payable Turnover?
6. What is the Days Accounts Payable Outstanding?
7. What is the Operating Cycle?
8. What is the Cash Conversion Cycle?
