5-4 CASH CONVERSION CYCLE Zane Corporation has an inventory conversion period of

Question

5-4 CASH CONVERSION CYCLE Zane Corporation has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days a. What is the length of the cash conversion cycle? b. If Zane's annual sales ar e $2,578,235 and all sales are on credit, what is the investment in accounts receivable? How many times per year does Zane turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio. c.

Explanation / Answer

a. Cash conversion cycle (CCC) = inventory conversion period + average collection period - payables deferral period

= 64+28-41 = 51 days

b. Average collection period = (Average accounts receivable / Sales) * 365

=> 28 / 365 = Accounts receivable / 2578235

=> Accounts receivable = $197,782.41

c. Inventory = (inventory conversion period * COGS) / 365

= (64 * 0.75 * 2578235) / 365 = $339,055.56

Inventory turnover ratio = Sales / Inventory = 2578235 / 339,055.56 (used sales in numerator)

= 7.6 times per year

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