5 Below Table gives the complete details of sales and costs of the goods produced by XYZ ltd for the year 31.03.12. Table -Sales and Costs Produced by XYZ Ltd.
| Sales | 80,000 | Inventory | |
| Cost of goods | 56,000 | 31.03.07
31.03.08 Accounts Receivables 31.03.07 31.03.08 Accounts Payable 31.03.07 7,000 31.03.08 |
9,000
12,000
12,000 16,000
7,000 10,000 |
What is the length of the operating cycle? What is the cash cycle?
Assume 365 days in a year.
a) length of the operating cycle
b) cash cycle
Solution
Operating Cycle = Inventory Conversion Period + Accounts Receivables Conversion Period
From the above formula we need to first calculate the individual conversion periods.
inventory conversion period
Average Inventory / Annual Cost of goods sold *365
= (9000 12000) / 2 | 56000 * 365
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