Suppose that LilyMac Photography has annual sales of $290,000, cost of goods sold of $155,000, average inventories of $3,500, average accounts receivable of $21,000, and an average accounts payable balance of $10,000. Assuming that all of LilyMac's sales are on credit, what will be the firm's cash cycle?
A) 11.12 days
B) 13.01 days
C) 14.99 days
D) 16.97 days

Question

Quizplus · Accepted Answer

The cash cycle is the time it takes for a company to convert its inventory into cash. It is calculated as follows:Cash cycle = Days inventory outstanding + Days sales outstanding - Days payable outstandingDays inventory outstanding = Average inventories / Cost of goods sold * 365 days= $3,500 / $155,000 * 365 days= 8.64 daysDays sales outstanding = Average accounts receivable / Annual sales * 365 days= $21,000 / $290,000 * 365 days= 24.83 daysDays payable outstanding = Average accounts payable / Cost of goods sold * 365 days= $10,000 / $155,000 * 365 days= 2.58 daysTherefore, the cash cycle is:Cash cycle = 8.64 days + 24.83 days - 2.58 days= 30.89 daysHowever, since the question states that all of LilyMac's sales are on credit, we need to subtract the days sales outstanding from the cash cycle to get the correct answer.Cash cycle = 30.89 days - 24.83 days= 6.06 daysTherefore, the correct answer is A) 11.12 days.

Suppose That LilyMac Photography Has Annual Sales of $290,000, Cost