Globex Corp. is a mature firm that has a stable flow of business. The following
ID: 2734873 • Letter: G
Question
Globex Corp. is a mature firm that has a stable flow of business. The following data were taken from its financial statements last year. Globex Corp.'s CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? Current assets should be divided by sales, but current liabilities should be divided by the COGS. Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.Explanation / Answer
1. Inventory Conversion period = 365/ inventory turnover = 365/6 = 60.83 days
inventory turnover = Cost of goods sold / inventory = 16.8/2.8 = 6
2. Average collection period = 365/ accounts receivable turnover ratio = 365/13.33 = 27.38 days
accounts receivable turnover ratio = annual sales/accounts receivable = $24/$1.8 = 13.33
3. Payables deferral period = 365/accounts payable turnover ratio = 365/10 = 36.5 days
accounts payable turnover ratio = sales/accounts payable = 24/2.4 = 10
4. Cash conversion cycle = inventory conversion period + average collection period - payables deferral period = 60.83+13.33-10 = 64.16 days
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