You have been asked by supervisor to figure out the firm’s cash conversion cycle
ID: 2765189 • Letter: Y
Question
You have been asked by supervisor to figure out the firm’s cash conversion cycle. After checking the financial statements, you see that the average inventory was $20,000, accounts receivables were $15,500, and accounts payables were $12,000. You also notice that the company had sales of $145,000 and that its cost of goods sold was $111,600. Given these numbers, the firm’s cash conversion cycle is: (Assume 365 days in a year; Do not round intermediate calculations. Round final answer to two decimal places.)
Explanation / Answer
Answer
Particulars
Average balance
Days
Average balance * Days
Sales/ Cost of goods sold
Days
A
B
C
D
A*B
C/D
Inventory days
A
20000
365
7300000
111600
65
Accounts receivables days
B
15500
365
5657500
145000
39
Accounts payable days
C
12000
365
4380000
111600*
39
Cash Conversion Cycle (A+B-C)
65
*Generally credit purchase figures is used to find accounts payable days. In absence of Purchase figures, we have taken cost of goods sold figures to find accounts payable days.
Answer : Given these numbers, the firm’s cash conversion cycle is 65 days.
Particulars
Average balance
Days
Average balance * Days
Sales/ Cost of goods sold
Days
A
B
C
D
A*B
C/D
Inventory days
A
20000
365
7300000
111600
65
Accounts receivables days
B
15500
365
5657500
145000
39
Accounts payable days
C
12000
365
4380000
111600*
39
Cash Conversion Cycle (A+B-C)
65
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