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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. 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
Expert Solution
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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