Year Average Credit Sales = $180,000 COGS = $135,000
How many days are in the cash cycle?

Question

Year Average  Credit Sales = $180,000 COGS = $135,000
How many days are in the cash cycle?

Quizplus · Accepted Answer

The cash cycle is the time it takes for a business to receive cash from its customers after it has paid for its inventory. To calculate the cash cycle, we need to subtract the average number of days it takes to sell inventory (days inventory outstanding or DIO) from the average number of days it takes to collect cash from customers (days sales outstanding or DSO), and add the average number of days it takes to pay suppliers (days payable outstanding or DPO).

We are not given the DIO or DPO in the question, but we can use the COGS to estimate DIO. Assuming a 365-day year, DIO = (COGS / Average inventory) = (135,000 / (180,000 / 365)) = 273 days.

To calculate DSO, we need to divide the average accounts receivable by the daily credit sales. Since we are given the average credit sales for the year, we can assume that the daily credit sales are (180,000 / 365) = $493.15. DSO = (Average accounts receivable / Daily credit sales) = (unknown / 493.15). Unfortunately, we are not given the average accounts receivable, so we cannot calculate DSO.

Since we don't have all the information we need to calculate the cash cycle, we can make an estimate by assuming that DSO is about 30 days (i.e., it takes about a month for customers to pay on credit). This is a common assumption for businesses that extend credit.

Therefore, the estimated cash cycle = DIO + DSO - DPO = 273 + 30 - unknown. Since we don't know DPO either, we can't calculate the exact cash cycle. However, we can eliminate some answer choices based on reasonableness.

A) 28 days - This seems too short for a cash cycle, as it would imply that the business pays suppliers after receiving cash from customers, which is unlikely. Eliminate. 
B) 31 days - This is also too short, for the same reason as A. Eliminate. 
C) 59 days - This is a reasonable estimate for the cash cycle, based on the information we have. Keep. 
D) 62 days - This is close to C, but slightly longer. Since we don't have enough information to differentiate between the two, we can't choose both. Eliminate. 
E) 90 days - This seems too long for a cash cycle, as it would imply that the business takes a very long time to sell inventory and/or collect cash from customers. Eliminate.

Therefore, the best choice is C: 59 days. Note that this is just an estimate based on assumptions, and the actual cash cycle for the business could be different based on its particular circumstances.