PT Wastra Handicrafts has net global sales of USD423,000 with 30 percent of it being credit sales. Its cost of goods sold is USD324,000. The firm’s cash conversion cycle is 47.9 days. The firm’s operating cycle is 86.3 days. What is the firm’s accounts payable? (Round to the nearest dollar)
The Correct Answer and Explanation is:
To determine the firm’s accounts payable, we will need to use the following formula for the cash conversion cycle (CCC):CCC=Days Sales Outstanding (DSO)+Days Inventory Outstanding (DIO)−Days Payables Outstanding (DPO)\text{CCC} = \text{Days Sales Outstanding (DSO)} + \text{Days Inventory Outstanding (DIO)} – \text{Days Payables Outstanding (DPO)}CCC=Days Sales Outstanding (DSO)+Days Inventory Outstanding (DIO)−Days Payables Outstanding (DPO)
We are given the following information:
- Net global sales = USD 423,000
- Credit sales = 30% of net global sales = 423,000×0.30=126,900423,000 \times 0.30 = 126,900423,000×0.30=126,900
- Cost of Goods Sold (COGS) = USD 324,000
- Cash Conversion Cycle (CCC) = 47.9 days
- Operating Cycle = 86.3 days
From the operating cycle, we know that:Operating Cycle=Days Sales Outstanding (DSO)+Days Inventory Outstanding (DIO)\text{Operating Cycle} = \text{Days Sales Outstanding (DSO)} + \text{Days Inventory Outstanding (DIO)}Operating Cycle=Days Sales Outstanding (DSO)+Days Inventory Outstanding (DIO)
We can now rearrange the formula for CCC to solve for Days Payables Outstanding (DPO):DPO=DSO+DIO−CCC\text{DPO} = \text{DSO} + \text{DIO} – \text{CCC}DPO=DSO+DIO−CCC
We can find the DSO and DIO from the given values and COGS:
- DSO (Days Sales Outstanding):
DSO measures how long it takes to collect credit sales. Using the formula: DSO=Accounts ReceivableCredit Sales per Day\text{DSO} = \frac{\text{Accounts Receivable}}{\text{Credit Sales per Day}}DSO=Credit Sales per DayAccounts Receivable Given that credit sales = 126,900, the daily credit sales would be: Daily Credit Sales=126,900365≈347.67\text{Daily Credit Sales} = \frac{126,900}{365} \approx 347.67Daily Credit Sales=365126,900≈347.67 From the Operating Cycle: Operating Cycle=86.3 days\text{Operating Cycle} = 86.3 \text{ days}Operating Cycle=86.3 days Therefore: DSO=86.3 days\text{DSO} = 86.3 \text{ days}DSO=86.3 days - DIO (Days Inventory Outstanding):
The DIO can be found by: DIO=InventoryCOGS per Day\text{DIO} = \frac{\text{Inventory}}{\text{COGS per Day}}DIO=COGS per DayInventory Given that the COGS = 324,000, the daily COGS would be: Daily COGS=324,000365≈890.41\text{Daily COGS} = \frac{324,000}{365} \approx 890.41Daily COGS=365324,000≈890.41 Now, plugging values into the formula: Operating Cycle=86.3 days⇒DIO=Operating Cycle−DSO=86.3−47.9≈38.4 days\text{Operating Cycle} = 86.3 \text{ days} \quad \Rightarrow \quad \text{DIO} = \text{Operating Cycle} – \text{DSO} = 86.3 – 47.9 \approx 38.4 \text{ days}Operating Cycle=86.3 days⇒DIO=Operating Cycle−DSO=86.3−47.9≈38.4 days - Finding DPO (Days Payables Outstanding): Now that we know DSO and DIO, we can use the formula for CCC to solve for DPO: DPO=47.9 days⇒DPO=47.9+38.4−47.9=38.4 days\text{DPO} = 47.9 \text{ days} \quad \Rightarrow \quad \text{DPO} = 47.9 + 38.4 – 47.9 = 38.4 \text{ days}DPO=47.9 days⇒DPO=47.9+38.4−47.9=38.4 days
- Accounts Payable: Finally, we can calculate the Accounts Payable using the formula: Accounts Payable=DPO×COGS per Day\text{Accounts Payable} = \text{DPO} \times \text{COGS per Day}Accounts Payable=DPO×COGS per Day Using the COGS per day of 890.41: Accounts Payable=38.4×890.41≈34,200\text{Accounts Payable} = 38.4 \times 890.41 \approx 34,200Accounts Payable=38.4×890.41≈34,200
So, the firm’s accounts payable is approximately USD 34,200.
