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.