2. Cash Flow Cycle of a Business Purchase of Materials Payment for Materials Sale of Product Collect A/R Days’ Inventory Cash Conversion Cycle Days’ Receivables Days’ Payables Day 1 Day 30 Day 45 Day 75
3. Working Capital Cash Flow Cycle: Cash Conversion Cycle Formulas for three time periods are necessary to calculate the cash conversion cycle.
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20. Aging Schedule Separates A/R into current and past due receivables in 30-day increments (on a customer or aggregate basis) and can determine the percent past due Age of Accounts A/R % of A/R 0 – 30 days 31 – 60 days 61 – 90 days 91 + days Total $1,750,000 $375,000 $250,000 $125,000 $2,500,000 70% 15% 10% 5% 100%
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22. A/R Balance Pattern The total outstanding A/R balance at the end of March is: $595,000 = ($50,000 + $165,000 + $380,000) The estimate of cash inflows for April = 5% of April sales + 40% of March sales + 35% of February sales + 20% of January sales: Month Sales Sales Remaining A/R from Month Sales at End of March February January March April $250,000 $300,000 $400,000 $500,000 20% 55% 95% Remaining A/R as a % of Month Sales $50,000 $165,000 $380,000 Estimated April inflows = (0.05 x $500,000) + (0.40 x $400,000) + (0.35 x $300,000) + (0.20 x $250,000) = $340,000
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