Accounting for Managers: Cash Cycle Period and Special Order Decision

ACCOUNTING FOR MANAGERS

Solution 1:
The estimated time period in which the company makes all the payments and receives all the
payments is known as the cash cycle period (McLaney & Adril, 2016). The cash cycle is
calculated by adding the inventories period and debtor’s period and then subtracting the
creditors period. A shorter cash cycle is always preferable. It helps to know about the
liquidity position of the company. It is very important for the company to maintain adequate
levels of liquidity as lack of liquidity or availability of huge liquidity might hamper the
workings of the company. It has a direct impact on the financial performance and position of
the company (Seal, 2012).
The following table shows the data that has been used to calculate the cash cycle period:
Particulars 2018 2017 2016 2015 2014
Inventory
2,32,08
0 1,67,898
1,92,39
8 1,94,889 1,84,167
Debtors
2,00,56
1 1,68,536
1,43,67
3 1,19,508 1,06,660
Creditors
2,25,91
0 1,69,324
1,56,04
4 1,39,081 1,64,152
Cogs 11,66,329 10,72,436 10,42,595 9,91,538 9,42,455
Sales 14,38,281 12,26,663 11,95,967 11,12,630 10,69,392
The calculation of the cash cycle is shown below:
Inventory
Turnover
6
3
6
1
6
8
7
0
3
6
Debtor Turnover
4
7
4
6
4
0
3
7
1
8
Creditor Turnover
6
2
5
5
5
2
5
6
3
2
Cash Cycle
4
8
5
2
5
6
5
1
2
2

There has been an increase in the cash cycle from the year 2014 to 2017 but it has been
observed that in current year the cash cycle has become shorter when compared to the
previous year (Horngren, 2012). A shorter cash cycle is considered to favourable for the
company. A cash cycle of 48 days means that the cash is usually settled in the span of 48
days.
It is observed from the financial statements that the cash from operating activities has
declined to $58564 from $70221 in the recent two years which shows that the company’s
performance declining (Holtzman, 2013). However, the company might be observing a
growth opportunity in the future because we can see that the company has spent a lot of
money in doing investments. The cash inflow from investing activities in the year 2017 was $
138110 but this year the amount is in negative which shows that the company has made huge
investments.