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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:

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Operating Cycle in Accounting: Definition & Formula

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Chapter 22 / Lesson 42
3.2K

An 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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