Question
BOP Clothing Co. 2016 2017 Cash $ 45,000 $ 30,000 Accounts receivable 250,000 325,000 Inventory 830,000 800,000 Accounts payable 720,000 775,000 Purchases 1,100,000 1,425,000 Cost
BOP Clothing Co.
2016
2017
Cash
$ 45,000
$ 30,000
Accounts receivable
250,000
325,000
Inventory
830,000
800,000
Accounts payable
720,000
775,000
Purchases
1,100,000
1,425,000
Cost of goods sold
1,145,000
1,455,000
Sales
1,750,000
1,950,000
Operating Cycle
Inventory days1
264.6
200.7
Receivable days2
52.1
60.8
Operating cycle
316.7
261.5
Less: Accounts payable days3
238.9
198.5
Days to be financed
77.8
63.0
Working capital
$ 405,000
$ 380,000
Current ratio
1.56
1.49
Acid-test ratio
0.41
0.46
These data indicate that BOP has reduced its overall operating cycle (to 261.5 days) as well as the number of days to be financed with sources of funds other than accounts payable (from 78 to 63 days). Most businesses cannot finance the operating cycle with accounts payable financing alone, so working capital financing, usually short-term interest-bearing loans, is needed to cover the shortfall. In this case, BOP would need to borrow less money to finance its operating cycle in 2017 than in 2016.
Instructions
(a)
Use the BOP analysis to briefly discuss how the operating cycle data relate to the amount of working capital and the current and acid-test ratios.
(b)
Select two other real companies that are in the same industry and complete the operating cycle worksheet, along with the working capital and ratio analysis. Briefly summarize and interpret the results. To simplify the analysis, you may use ending balances to compute turnover ratios.
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