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Homework answers / question archive / Pretty Lady Cosmetic Products has an average production process time of 40 days

Pretty Lady Cosmetic Products has an average production process time of 40 days

Finance

Pretty Lady Cosmetic Products has an average production process time of 40 days. Finished goods are kept on hand for an average of 15 days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives 40 days of credit on its purchases from suppliers.

Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?

*Note: To solve this problem, you will need to first find the Inventory Period, the Receivables Period, and the Payment Period.

$153,054.79

$154,054.79

$152,054.79

$152,154.80

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Computation of Net Financing Need:

Operating Cycle =Inventory period +Receivable period 

=(40+15)+35 

= 55 + 35

= 90 days

 

Number of Turnovers per Year = 365/90 = 4.06 times

Annual Sales = $1200,000

COGS = $900,000

 

Average Inventory = ($900,000/365)* 55 days = $135616.44

Average Account receivable =($1200,000/365)* 35days = $115068

Accounts Payable = ($900,000/365)* 40days = $98630

 

Net Financing =Average Account Receivables + Average Inventory - Accounts Payable 

=115068.49+135616.44-98630.14 

Net Financing = 152054.79

So, the correct option is 3rd "152,054.79

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