Original Revised Annual sales: unchanged $110,000 $110,000 Cost of goods sold: u
ID: 2665942 • Letter: O
Question
Original Revised
Annual sales: unchanged $110,000 $110,000
Cost of goods sold: unchanged $80,000 $80,000
Average inventory: lowered by $4,000 $20,000 $16,000
Average receivables: lowered by $2,000 $16,000 $14,000
Average payables: increased by $2,000 $10,000 $12,000
Days in year 365 365
Explanation / Answer
The formula for calculating the Cash conversion cycle is
CCC = DIO + DSO - DPO
Where DIO represents Days inventory Outstanding
DSO represents Days Sales Outstanding
DPO represents Days Payable outstanding
Cash conversion cycle impact by inventory reduction
DIO = (Average inventory / Cost of goods sold) * 365
Original DIO = ($20,000/$80,000) *365 =91.25 days
Revised DIO= ($16,000/$80,000 *365) = 73 days
Cash conversion cycle impact by reduced accounts receivable
DPO = (Accounts payable / Cost of goods sold) * 365
Original DPO =($10,000/$80,000)*365 = 45.625 days
Revised DPO = ($12,000/$80,000) *365 = 54.75 days
Cash conversion cycle impact by increased a/c payable
DSO = (Total receivables / Total credit sales) * 365
Original DSO = ($16,000/$110,000 *365) = 53.09 days
Revised DSO = ($14,000/$110,000 *365) = 46.45 days
CCC = DIO + DSO – DPO
Original CCC = 91.25 + 53.09 – 45.63 = 98.71 days
Revised CCC = 73 + 46.45 – 54.75 = 64.7 days
Total impact = original CCC – Revised CCC = 98.71 – 64.7 = 34.01 days
So, cash conversion cycle will be lowered by 34.0 days
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