Essentials of Corporate Finance



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Ross FCF 10Ce Ch18
Ross FCF 10Ce Ch18

The Cash Cycle

  • 18-

Figure 18.1 – Cash Flow Time Line

  • 18-

Example Information

  • Inventory:
    • Beginning = 5000
    • Ending = 6000
  • Accounts Receivable:
    • Beginning = 4000
    • Ending = 5000
  • Accounts Payable:
    • Beginning = 2200
    • Ending = 3500
  • Net sales = 30,000 (assume all sales are on credit)
  • Cost of Goods sold = 12,000
  • 18-

Example – Operating Cycle

  • Inventory period
    • Average inventory = (5000 + 6000)/2 = 5500
    • Inventory turnover = 12,000 / 5500 = 2.18 times
    • Inventory period = 365 / 2.18 = 167 days
  • Receivables period
    • Average receivables = (4000 + 5000)/2 = 4500
    • Receivables turnover = 30,000/4500 = 6.67 times
    • Receivables period = 365 / 6.67 = 55 days
  • Operating cycle = 167 + 55 = 222 days
  • 18-

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