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Problems Final

The document defines and provides formulas for calculating three cash flow metrics: 1) Operating Cycle (OC) is equal to the number of days inventory is held (DSI) plus the number of days receivables are outstanding (DSO). It uses data on inventory, receivables, payables, sales and cost of goods sold to calculate OC for a company. 2) Cash Conversion Cycle (CCC) is equal to DIO + DSO - DPO. It uses similar data as the OC but also incorporates days payables are outstanding to determine how long it takes for cash to convert into cash flows. 3) The Baumol model and probabilistic model provide formulas for determining a target cash balance

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Mhay Teofilo Bal-ad
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22 views2 pages

Problems Final

The document defines and provides formulas for calculating three cash flow metrics: 1) Operating Cycle (OC) is equal to the number of days inventory is held (DSI) plus the number of days receivables are outstanding (DSO). It uses data on inventory, receivables, payables, sales and cost of goods sold to calculate OC for a company. 2) Cash Conversion Cycle (CCC) is equal to DIO + DSO - DPO. It uses similar data as the OC but also incorporates days payables are outstanding to determine how long it takes for cash to convert into cash flows. 3) The Baumol model and probabilistic model provide formulas for determining a target cash balance

Uploaded by

Mhay Teofilo Bal-ad
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
Download as docx, pdf, or txt
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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.

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