Question

Young's had a beginning accounts payable balance of $42,900 and an ending accounts payable balance of $44,800. Sales for the period were $770,000 and costs of goods sold were $598,000. If the operating cycle is 129 days, how long is the firm's cash cycle

Answer 1

The cash cycle can be calculated as:
Cash cycle = Operating cycle - Accounts payable deferral period

To find the accounts payable deferral period, we first need to calculate the average accounts payable balance:
Average accounts payable = (Beginning accounts payable + Ending accounts payable) / 2
Average accounts payable = ($42,900 + $44,800) / 2 = $43,850

The accounts payable deferral period can be found by dividing the average accounts payable by the daily cost of goods sold:
Accounts payable deferral period = Average accounts payable / Daily cost of goods sold
Daily cost of goods sold = Annual cost of goods sold / 365
Annual cost of goods sold = $598,000

Daily cost of goods sold = $598,000 / 365 = $1,636.99
Accounts payable deferral period = $43,850 / $1,636.99 = 26.78 days

Now we can calculate the cash cycle:
Cash cycle = Operating cycle - Accounts payable deferral period
Cash cycle = 129 days - 26.78 days
Cash cycle = 102.22 days

Therefore, the firm's cash cycle is 102.22 days.