Operating Cycle
Operating Cycle
Chapter 26, Questions 3, 5, 8, 11
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3).
Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.
a. Receivables average goes up.
b. Credit repayment times for customers are increased.
c. Inventory turnover goes from 3 times to 6 times.
d. Payables turnover goes from 6 times to 11 times.
e. Receivables turnover goes from 7 times to 9 times.
f. Payments to suppliers are accelerated.
5).
The Litzenberger Company has projected the following quarterly sales amounts for the coming year:
Q1 Q2 Q3 Q4
Sales $740 $810 $780 $940
a. Accounts receivable at the beginning of the year are $310. Litzenberger has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following:
Q1 Q2 Q3 Q4
Beginning receivables
Sales
Cash collections
Ending receivables
b. Rework (a) assuming a collection period of 60 days.
c. Rework (a) assuming a collection period of 30 days.
8).
The Thakor Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales, and interest and dividends are $73 per quarter. No capital expenditures are planned. Here are the projected quarterly sales:
Q1 Q2 Q3 Q4
Sales $1,320 $1,490 $1,380 $1,190
Sales for the first quarter of the following year are projected at $1,450. Calculate the company’s cash outlays by completing the following:
Q1 Q2 Q3 Q4
Payment of accounts
Wages, taxes, and other expenses
Long-term financing expenses
(interest and dividends)
Total
11).
Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:
COUNTRY KETTLES, INC.
Balance Sheet
2011 2012
Assets
Cash $ 48,180 $ 45,815
Accounts receivable 100,155 105,413
Inventories 83,600 89,716
Property, plant, and equipment 225,992 249,086
Less: Accumulated depreciation (77,194) (85,579)
Total assets $380,733 $404,451
Liabilities and Equity
Accounts payable $ 72,522 $ 50,396
Accrued expenses 10,980 9,840
Long-term debt 49,500 45,000
Common stock 25,000 30,000
Accumulated retained earnings 222,731 269,215
