Eagle Paints Selected Income Statement Items, 2014 Cash Sales $2,500,000 Credit Sales $9,500,000 Total Sales $12,000,000 COGS $7,000,000

Question

Eagle Paints
Selected Balance Sheet Accounts
12/31/2014 12/31/13 Change
Accounts Receivable $550,000 $400,000 $150,000
Inventory $275,000 $250,000 $25,000
Accounts Payable $150,000 $110,000 $40,000

Using the information provided, what is the inventory turnover for Eagle Paints? What is the average production cycle for the firm? What is the average collection cycle? What could Eagle Paints do to reduce the average collection cycle?
What will be an ideal response?

Answer 1

Answer:
Inventory Turnover = COGS/Average Inventory = $7,000,000/[($275,000 + $250,000)/2] = 26.67 times
Average Production Cycle = 365 days/(Inventory Turnover) = 365 days/26.67 = 13.69 days
Average Collection Cycle = 365 days/Accounts Receivable Turnover
= 365 days/(Credit Sales/Average Accounts Receivable) = 365 days/($9,500,000/$475,000)
= 18.25 days

The last part of the question is somewhat open-ended. However, some common suggestions might include increasing cash sales and reducing credit sales; extending less credit by making it more difficult to qualify; and, adjusting credit terms to encourage customers to pay sooner.