OPERATING CYCLE

Formula:
Operating Cycle (OC)= Inventory Period + Accounts Receivable Period; or
= Days of Sale in Iventory Outstanding (DSI) + Days of Sales Outstanding(DSO)
Example: Calculate the OC with the given data below.
1. ITEM BEGINNING BALANCE ENDING BALANCE AVERAGE
Inventory $ 2,300,000.00 $ 3,500,000.00 $2,900,000.00
Accounts Receivable $ 1,750,000.00 $ 2,300,000.00 $2,025 000.00
Accounts Payable $ 700,000.00 $ 900,000.00 $ 800,000.00
Net Sales $ 13,000,000.00
Cost of Goods Sold $ 8,500,000.00

2. Information about Inventory and Accounts Receivable of MVS Co. in 20×8 financial year is as follows:

The revenue of MVS Co. in 20×8 financial year is $5,475,000. All sales were made on credit. The Cost Of
Goods Sold is $3,285,000 for the same period. What is the duration of OC?

CASH CONVERSION CYCLE

Formula: Cash Conversion Cycle (CCC)= DIO+DSO-DPO (Days of Payables Outstanding)

Example: Refer to the examples above…
1. Beg. Accounts Payable- $570,000
End. Accounts Payable- $114,000

2. MVS Co. posted a $150,000 beginning Accounts Payable and $125,000 ending Accounts payable for the
fiscal year ended 20×8.
 BAUMOL MODEL
1.A company estimates a cash requurement of $2,000,000 for a one month period. The opportunity interest rate
is 6% per annum, which works out to 0.5% per month. The transactiin cost for borrowing or withdrawing funds is
$150.

PROBABILISTIC MODEL
1.XYZ's management has set the minimum cash balance to be equal to $10,000. The standard deviation of daily
cash flow is $200 and the interest rate on marketable securities is 9% per annum. The transactiin cost for each
sale or purchase of securities is $20. Compute for the target cash balance.