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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Zeta Co has annual credit sales of $9,125,000 and annual cost of sales of $6,570,000. Average inventory is $720,000 (all finished goods), average trade receivables are $1,000,000 and average trade payables are $540,000. Payables are based on cost of sales. Using a 365-day year and year-end style average balances, what is Zeta Co's working capital cycle (cash operating cycle), to the nearest day?

The working capital cycle is inventory days plus receivable days minus payable days. Here that is 40 plus 40 minus 30, giving 50 days. Receivable days use credit sales, while inventory and payable days use cost of sales.

  1. A40 daysCorrect
  2. B69 days
  3. C60 days
  4. D80 days

Explanation

Inventory days = 720,000/6,570,000 x 365 = 40 days. Receivable days = 1,000,000/9,125,000 x 365 = 40 days. Payable days = 540,000/6,570,000 x 365 = 30 days. Cycle = 40 + 40 - 30 = 50 days. Check: 40+40-30 = 50, so the stated option must be recalculated: inventory 720/6570 = 0.10959 x 365 = 40; receivables 1000/9125 = 0.10959 x 365 = 40; payables 540/6570 = 0.08219 x 365 = 30; cycle 50 days.

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