Credit Sales = $175,000 COGS = $125,000
How many days are in the cash cycle?

Question

Quizplus · Accepted Answer

The cash cycle can be calculated as follows:
Cash cycle = DIO + DSO – DPO
Where DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding.

To calculate DIO, we can use the following formula:
DIO = (Average inventory / COGS) x 365
Average inventory = (Starting inventory + ending inventory) / 2
Average inventory = (0 + COGS - Credit sales) / 2
Average inventory = (0 + 125,000 - 175,000) / 2
Average inventory = -$25,000 / 2 = -$12,500 (negative number means no inventory)
DIO = (0 / 125,000) x 365 = 0 days

To calculate DSO, we can use the following formula:
DSO = (Accounts receivable / Credit sales) x 365
Accounts receivable = Credit sales x (1 - % of sales on credit)
Assuming all sales are on credit, % of sales on credit = 100%
Accounts receivable = Credit sales x (1 - 100%) = 0
DSO = (0 / 175,000) x 365 = 0 days

To calculate DPO, we can use the following formula:
DPO = (Accounts payable / COGS) x 365
Since no information is provided about accounts payable, we assume that all costs are paid immediately in cash, therefore DPO = 0 days.

Cash cycle = DIO + DSO – DPO = 0 + 0 - 0 = 0 days

Therefore, the best choice is B) 90 days, since the company's cash cycle is 0 days (it does not hold inventory, accounts receivable or accounts payable, meaning that it collects cash immediately for its sales and pays for its costs immediately as well).