Compute the operating cycle for King Corporation.
Question:
A partial balance sheet and income statement for King Corporation follow:
| KING CORPORATION | |
| Partial Balance Sheet | |
| December 31, 2009 | |
| Assets | |
| Current Assets | |
| Cash | $33,493 |
| Marketable securities | 215,147 |
| Receivables, less allowance of $6,000 | 255,000 |
| Inventories, LIFO | 523,000 |
| Prepaid expenses | 26,180 |
| Total Current assets | $1,052,820 |
| Liabilities | |
| Current liabilities | |
| Trade accounts payable | $103,689 |
| Notes payable (primarily as bonds) and commercial paper | 210,381 |
| Accrued expenses and other liabilities | 320,602 |
| Income taxes payable | 3,120 |
| Long-term debt | 22,050 |
| Total current liabilities | $459,842 |
| KING CORPORATION | |
| Partial Income Statement | |
| For Year Ended December 31, 2009 | |
| Net sales | $3,050,600 |
| Miscellaneous income | 45,060 |
| $3,095,660 | |
| Cost and expenses: | |
| Cost of sales | $2,185,100 |
| Selling, general and administrative expenses | 350,265 |
| Interest expense | 45,600 |
| Income taxes | 300,000 |
| $2,880,965 | |
| $214,695 | |
Note: The receivables at December 31, 2008 were $280,000, net of allowance of $8,000, for a gross receivables figure of $288,000. The inventory at December 31, 2008 were $565,000.
Compute the operating cycle for King Corporation.
Operating cycle:
It is the time period which is taken by the company to make their transaction from producing the goods into final sale of goods to the customer and receive the consideration in the form of cash for the final goods.
Answer and Explanation: 1
1.
{eq}\begin{align*} {\rm\text{Ending Accounts Receivable}} &= {\rm\text {Net Accounts Receivable}} + {\rm\text {Allowance}}\\ &= \$ 255,000 + \$ 6,000\\ &= \$ 261,000 \end{align*} {/eq}
2.
{eq}\begin{align*} {\rm\text {Average Accounts Receivable}} &= \frac{{{\rm\text {Beginning Accounts Receivable}} + {\rm\text {Ending Accounts Receivable}}}}{2}\\ &= \frac{{\$ 288,000 + \$ 261,000}}{2}\\ &= \$ 274,500 \end{align*} {/eq}
3.
{eq}\begin{align*} {\rm\text {Accounts Receivable Turnover Ratio}} &= \frac{{{\rm\text {Net Sales}}}}{{{\rm\text {Average Accounts Receivable}}}}\\ &= \frac{{\$ 3,050,600}}{{\$ 274,500}}\\ &= 11.113 \end{align*} {/eq}
4.
{eq}\begin{align*} {\rm\text {Accounts Receivable Turnover in Days}} &= \frac{{{\rm\text {Number of Days in a Year}}}}{{{\rm\text {Accounts Receivable Turnover Ratio}}}}\\ &= \frac{{365}}{{11.113}}\\ &= 32.84{\rm\text { Days}} \end{align*} {/eq}
5.
{eq}\begin{align*} {\rm\text {Average Inventory}} &= \frac{{{\rm\text {Beginning Inventory}} + {\rm\text {Ending Inventory}}}}{2}\\ &= \frac{{\$ 565,000 + \$ 523,000}}{2}\\ &= \$ 544,000 \end{align*} {/eq}
6.
{eq}\begin{align*} {\rm\text {Inventory Turnover Ratio}} &= \frac{{{\rm\text {COGS}}}}{{{\rm\text {Average Inventory}}}}\\ &= \frac{{\$ 2,185,100}}{{\$ 544,000}}\\ &= 4.0167 \end{align*} {/eq}
7.
{eq}\begin{align*} {\rm\text {Inventory Turnover in Days}} &= \frac{{{\rm\text {Number of Days in a Year}}}}{{{\rm\text {Inventory Turnover Ratio}}}}\\ &= \frac{{365}}{{4.0167}}\\ &= 90.87{\rm\text { Days}} \end{align*} {/eq}
8.
{eq}\begin{align*} {\rm\text {Operating Cycle}} &= {\rm\text {Accounts Receivable Turnover in Days}} + {\rm\text {Inventory Turnover in Days}}\\ &= 32.84 + 90.87\\ &= 123.71{\rm\text { Days}} \end{align*} {/eq}
The operating cycle is 123.71 days.
Learn more about this topic:
from
Chapter 22 / Lesson 42An operating cycle consists of lead time, production time, sales time, delivery time, and cash-collection time. Learn the definitions of the parts of the operating cycle, how long the operation cycles are for different industries, and the formula used for calculating the operating cycle in accounting.
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