Using the following information and the Bardahl formula, calculate the operating cycle and working capital needs of T Corporation who has operating expenses of
282,000
307,000 Ending Inventory 42,500 33,800 36,200 COGS Total 190,000 210,000 240,000 Purchases 171,000 196,000 210,000 Accounts Receivable 48,000 49,000 52,000 Accounts Payable 70,000 67,000 59,000 Inventory Cycle: A/R Cycle: A/P Cycle: Total: Working Capital Needs:
The Correct Answer and Explanation is:
To calculate the operating cycle and working capital needs for T Corporation, we’ll first need to compute the following:
1. Inventory Cycle:
This refers to the number of days it takes to sell inventory. The formula for the inventory cycle is: Inventory Cycle=Average InventoryCOGS per Day\text{Inventory Cycle} = \frac{\text{Average Inventory}}{\text{COGS per Day}}Inventory Cycle=COGS per DayAverage Inventory
Where:
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
- COGS per Day = COGS / 365
For Year 1:
- Average Inventory = (42,500 + 33,800) / 2 = 38,150
- COGS per Day = 190,000 / 365 ≈ 520.55
Inventory Cycle = 38,150 / 520.55 ≈ 73.3 days
2. A/R Cycle (Accounts Receivable Cycle):
This measures the number of days it takes to collect accounts receivable. The formula for the A/R cycle is: A/R Cycle=Average Accounts ReceivableCredit Sales per Day\text{A/R Cycle} = \frac{\text{Average Accounts Receivable}}{\text{Credit Sales per Day}}A/R Cycle=Credit Sales per DayAverage Accounts Receivable
Where:
- Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
- Credit Sales per Day = Total Sales / 365 (assuming total sales can be approximated as COGS)
For Year 1:
- Average Accounts Receivable = (48,000 + 49,000) / 2 = 48,500
- Credit Sales per Day = 190,000 / 365 ≈ 520.55
A/R Cycle = 48,500 / 520.55 ≈ 93.2 days
3. A/P Cycle (Accounts Payable Cycle):
This measures the number of days it takes to pay accounts payable. The formula for the A/P cycle is: A/P Cycle=Average Accounts PayablePurchases per Day\text{A/P Cycle} = \frac{\text{Average Accounts Payable}}{\text{Purchases per Day}}A/P Cycle=Purchases per DayAverage Accounts Payable
Where:
- Average Accounts Payable = (Beginning Accounts Payable + Ending Accounts Payable) / 2
- Purchases per Day = Purchases / 365
For Year 1:
- Average Accounts Payable = (70,000 + 67,000) / 2 = 68,500
- Purchases per Day = 171,000 / 365 ≈ 469.86
A/P Cycle = 68,500 / 469.86 ≈ 146.1 days
4. Total Operating Cycle:
The operating cycle is the total time it takes for a company to convert its inventory into cash. It is the sum of the Inventory Cycle and the A/R Cycle: Operating Cycle=Inventory Cycle+A/R Cycle\text{Operating Cycle} = \text{Inventory Cycle} + \text{A/R Cycle} Operating Cycle=Inventory Cycle+A/R Cycle
Operating Cycle = 73.3 + 93.2 ≈ 166.5 days
5. Working Capital Needs:
Working capital is the capital needed to fund the operating cycle. The formula for working capital needs is: Working Capital Needs=Operating Cycle×Average Daily Operating Expenses\text{Working Capital Needs} = \text{Operating Cycle} \times \text{Average Daily Operating Expenses}Working Capital Needs=Operating Cycle×Average Daily Operating Expenses
Where:
- Average Daily Operating Expenses = Operating Expenses / 365
For Year 1:
- Average Daily Operating Expenses = 282,000 / 365 ≈ 772.60
Working Capital Needs = 166.5 * 772.60 ≈ 128,314.90
Summary of Calculations:
- Inventory Cycle: 73.3 days
- A/R Cycle: 93.2 days
- A/P Cycle: 146.1 days
- Operating Cycle: 166.5 days
- Working Capital Needs: 128,314.90
