Question 31a i
It is the middle of December 20X6 and Pangli Co is looking at working capital management for January 20X7.
Forecast financial information at the start of January 20X7 is as follows:
Inventory | $455,000 |
Trade receivables | $408,350 |
Trade payables | $186,700 |
Overdraft | $240,250 |
November 20X6 (actual) | $270,875 |
December 20X6 (forecast) | $300,000 |
January 20X7 (forecast) | $350,000 |
Pangli Co has a gross profit margin of 40%. Although Pangli Co offers 30 days credit, only 60% of customers pay in the month following purchase, while the remaining customers take an additional month of credit.
Inventory is expected to increase by $52,250 during January 20X7.
Pangli Co plans to pay 70% of trade payables in January 20X7 and defer paying the remaining 30% until the end of February 20X7. All suppliers of the company require payment within 30 days. Credit purchases from suppliers during January 20X7 are expected to be $250,000.
Interest of $70,000 is due to be paid in January 20X7 on fixed rate bank debt. Operating cash outflows are expected to be $146,500 in January 20X7. Pangli Co has no cash and relies on its overdraft to finance daily operations. Thecompany has no plans to raise long-term finance during January 20X7.
Assume that each year has 360 days.
Required:
(a) (i) Calculate the cash operating cycle of Pangli Co at the start of January 20X7. (2 marks)