Introduction to Accounting Preparing for a User’s Perspective Compute and understand the Operating Cycle Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store

+ = = Days Sales in Inventory Days Sales in Receivables Operating Cycle Raw materials Work-in- process (WIP) Finished goods Days from purchase-> sell->collect = Holding period Collection period Purchase Sell Collect the number of days between when the company purchases inventory, through to sales and final collection of cash from customers. Operating cycle:

+ = + Days Sales in Inventory Days Sales in Receivables Expanded operating cycle diagram + = Days Sales in Inventory Days Sales in Receivables Operating Cycle 365 days per year 365 days per year + Inventory Turnover Ratio AR Turnover Ratio

Requirement #1:  a) Average Inventory: _____________ b) Days Sales In Inventory:  _____________ c) AR Turnover Ratio: _____________ d) Days Sales in Receivables:  _____________ e) Operating cycle: _____________ Requirement #2:  a) What areas should the nephew look into improving? b) Give two recommendations that could possibly help your nephew improve his operating cycle. Cost of Goods Sold $40,000 Inventory Turnover Ratio 2 Net Credit Sales $200,000 Average Accounts Receivable $125,000

Step #1 Requirement #1: a) Average Inventory: _____________ b) Days Sales In Inventory:  _____________ c) AR Turnover Ratio: _____________ d) Days Sales in Receivables:  _____________ e) Operating cycle: _____________ Requirement #2:  a) What areas should the nephew look into improving? b) Give two recommendations that could possibly help your nephew improve his operating cycle. Step #1 Cost of Goods Sold $40,000 Inventory Turnover Ratio 2 What we know Net Credit Sales $200,000 What we need to know Average Accounts Receivable $125,000

= + + Step #2 Step #3 Step #4 Days Sales in Inventory Days Sales in Receivables Operating Cycle Step #2 365 days per year 365 days per year + Inventory Turnover Ratio AR Turnover Ratio Step #3 Step #4

+ = = Days Sales in Inventory Days Sales in Receivables Requirement 2a: What areas should the nephew look into improving? Days Sales in Inventory + Days Sales in Receivables = Operating Cycle 182.5 228.13 410.63 Days from purchase-> sell->collect = Holding period Collection period Purchase Sell Collect Operating cycle:

Days Sales in Inventory Requirement 2b: Give two recommendations that could possibly help your nephew improve his operating cycle. Days Sales in Inventory + $17,808 inventory reduction 182.5 (COGS $40,000 / 365 days) * 162.5 days - 162.5 30 Holding period Purchase Sell Operating cycle:

Days Sales in Receivables Requirement 2a: What areas should the nephew look into improving? + Days Sales in Receivables = $108,564 receivables reduction 228.13 (Net credit sales $200,000 / 365 days) * 198.13 days -198.13 30 Collection period Sell Collect Operating cycle:

How do you use the operating cycle? Days Sales in Inventory + Days Sales in Receivables = Operating Cycle 182.5 228.13 410.63 Days from purchase-> sell->collect = Holding period Collection period Purchase Sell Collect Operating cycle:

+ = Days Sales of Inventory Days Sales in Receivables Operating Cycle 20X1 12.12 44.50 56.62 20X2 15.96 30.20 46.16 20X3 15.96 27.40 43.36 20X4 19.83 24.70 44.53 20X5 26.60 24.20 50.80 20X6 28.01 23.00 51.01 Why did the operating cycle improve up to 20X3 then worsen to 20X6?

Less free working capital Not enough inventory? Too much inventory? Inventory carrying costs Less free working capital Not enough inventory? Inventory purchasing and selling Increased financing costs Missed sales Uncollectible Receivables Credit granting and collecting Not strict enough Too strict Dissatisfied customers Angry customers

Summary Be able to: define, compute and interpret the operating cycle solve for unknown variables in the operating cycle describe the positive and negative impacts of a short or long operating cycle

Introduction to Accounting Preparing for a User’s Perspective Compute and understand the Operating Cycle Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store