Q. Calculate ADs working capital cycle?

AD, a manufacturing entity, has the following balances at 30 April 2005:

Extract from financial statements:      $000

Trade receivables                                216

Trade payables                                    97

Revenue (all credit sales)                    992

Cost of sales                                        898

Purchases in year                                 641

Inventories at 30 April 2005:

Raw materials                                     111

Work in progress                                 63

Finished goods                                    102

Calculate AD's working capital cycle.

Solution:

Average time raw materials are in stock

(Raw materials / purchases) x 365 days

(111 / 641) x 365 = 63.2 days

Time taken to produce goods

(Work in progress & finished goods / cost of sales) x 365 days

(63 + 102 / 898) x 365 = 67.1 days

Time taken by customers to pay for goods

(Trade receivables / credit sales) x 365 days

(216 / 992) x 365 = 79.5 days

Period of credit taken from suppliers

(Trade payables / purchases) x 365 days

(97 / 641) x 36 = 55.2 days

Working capital cycle = 63.2 + 67.1 + 79.5 -55.2 = 154.6 days