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the following information has been taken or calculated from Fowlers financial statements for the year ended 30 September 2014.
Fowlers cash cycle at 30 September 2014 is 70 days
its inventory turnover is six times
Year end trade payables are $230,000
Credit purchases for the year were $2m
Cost of sales for the year was $1.8mWhat is fowlers trade receivables collection period as at 30 September 2014?
A, 106, B, 89, C, 56 D, 51
Where’s this one from? It’s not one of mine, that’s for sure!
Wherever it’s from, presumably the source also gives you an answer. Does it not also give an explanation?
Mike,
Thanks for getting back to me, to my surprise this question was in the pilot paper for F7 so an ACCA link perhaps.
Further to my surprise as this was one of two of the MCQ questions I got wrong the answer was D 51 with the explanation as follows:-
Inventory turnover is 6 so 365/6 =61
The cash cycle of 70 and payables cycle of 42 days
Thus (70-61+42)= 51A little confusing send with both the terminology and answer if honest…
Thanks
Payables days is 42 days (230,000 x 365 / 2,000,000)
Inventory turnover is simply the average number of days from buying inventory to selling it
And receivables days is the average number of days from selling inventory until you receive the money
And finally, the cash cycle is the difference between the aggregate number of days taken from buying inventory, converting it into sales and collecting the money (ie days held in inventory + days held as receivables) compared with the days taken on average to pay suppliers
In numbers, that’s 70 = 61 + Receivables days – 42
Rearranging that gives us receivables days of 51
Better?
Ah yes, I see it now. The cash cycle is effectively the operating cycle.
Inventory is 61
payables is (42)
receivables days ?
operating cycle is 70Hence the missing figure is 51….
So silly, typical ACCA keeping you on your toes, forcing you to really READ the question.
the following information has been taken or calculated from Fowlers financial statements for the year ended 30 September 2014.
Fowlers cash cycle at 30 September 2014 is 70 days
its inventory turnover is six times
Year end trade payables are $230,000
Credit purchases for the year were $2m
Cost of sales for the year was $1.8mWhat is fowlers trade receivables collection period as at 30 September 2014?
A, 106, B, 89, C, 56 D, 51
Hi,
A slightly different approach is required here. You have the cash (working capital) cycle at 70 days so would need to use this alongside the inventory days and payable days to get the receivable days.
Payable days can be calculated from the credit purchases and the cost of sales figures.
Inventory days can be calculated from the inventory turnover period. If we are turning over inventory over six times in a year (365 days) then we are holding it for on average 365/6 days.
We then know that the total of 70 days is equal to inventory + receivables – payables so you should then be able to find the answer.
Let me know if you do not.
Thanks
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