Ned's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash
Balance for the ﬁrst quarter of $20. Beginning receivables for the quarter amount to $35. Sales for
The ﬁrst and second quarters are expected to be $110 and $125, respectively, while purchases
Amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days.
What are cash collections in the ﬁrst quarter?

Question

Quizplus · Accepted Answer

First, we need to calculate the cash conversion cycle (CCC) by adding the average collection period (ACP) and inventory conversion period (ICP) and subtracting the accounts payable period (APP) from it.

CCC = ACP + ICP - APP
Given ACP = 45 days and operating cycle = 130 days, therefore,
ICP = Operating cycle - ACP
ICP = 130 - 45
ICP = 85

Given APP = 90 days
Therefore, CCC = 45 + 85 - 90 = 40 days.

Now, we can calculate the cash collection for the first quarter.

Beginning cash balance = $20
Minimum cash balance = $10
Therefore, the available cash balance for the first quarter = $10

Sales for the first quarter = $110
Out of which, 20% will be collected immediately (as per the policy), i.e., $22

The remaining 80% of sales, i.e., $88 will be collected in 45 days (as per the ACP)

Hence, the cash collected in the first quarter = $22 + $88 = $90

Therefore, the correct answer is choice D) $90.

Ned's Co Has an Average Collection Period of 45 Days and and an Operating