Pretty Lady Cosmetic Products has an average production process time of forty da

Question

Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives fort 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?

Explanation / Answer

operating cycle =Inventory period +Receivable period =(40+15)+35 =90 days

turn per year =365/90 =4.06 times

Annual Sales = $1200,000

COGS = $900,000

Average inventory=($900,000/365)* 55days= $135616.44

Average Account receivable =($1200,000/365)* 35days =$115068

Payment period =($900,000/365)* 40days =$98630

Net Financing =AR+Inventory-AP =115068.49+135616.44-98630.14 =152054.79

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