Princess Systems, Inc. has the following turnover ratios: Receivables turnover =

Question

Princess Systems, Inc. has the following turnover ratios: Receivables turnover = 6.0x; Inventory turnover = 4.0x; Payables turnover = 3.75x.

a. Find Princess Systems’ cash conversion period (CCP) using a 365-day year.
b. Now determine the firm’s cash conversion period if the receivables turnover increases to 7.0x and its inventory turnover ratio increases to 5.5x.
c. Now assume that the firm’s days inventory held (DIH) holds constant at the value you obtained in (b) above (when the inventory turnover was 5.5x), but the payables turnover increases to 5.3x. If the firm wants its cash conversion period to be no greater than 35 days, what must be the firm’s new receivables turnover?

Explanation / Answer

CCP = Inventory conversion period + Receivables conversion period – Payables conversion period Also Receivables Collection Period = 365 / Receivables Turnover Ratio Payables conversion period = 365/payables turnover ratio Inventory conversion period = 365/ inventory turnover ratio So We have CCP = 365/4 + 365/6 - 365/3.75 ie CCP/365 = 1/4 + 1/6 - 1/3.75 = (22.5 + 15 -24)/90 = 13.5/90 ie CCP/365 = 13.5/90 ie CCP = 365*13.5/90 = 54.75 days .....................Ans (a) b. We have CCP = 365/5.5 + 365/7 - 365/3.75 = 365*(1/5.5 + 1/7 - 1/3.75) ie CCP = 365* 0.0580 = 21.17 days.......................Ans (b) c. We have CCP = 365/5.5 + 365/X - 365/5.3 < 35 days ie 365/X + 365*(1/5.5-1/5.3) 365/37.50 So FIrms New Rxable Turnover Ratio should be 37.50

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