You have been hired as a financial consultant to help improve the performance of
ID: 2768527 • Letter: Y
Question
You have been hired as a financial consultant to help improve the performance of Blue Star Inc., which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of the analysis, you want to determine the firm’s cash conversion cycle. Use the following information and a 365-day year to answer the questions below. A
verage inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
1-Determine the inventory conversion period for Blue Star
2-Determine the average collection period for the company
3-How long is Blue Star's cash conversion cycle in terms of number of days?
Explanation / Answer
The inventory conversion period is essentially the time period during which a company must invest cash while it converts materials into a sale
Average inventory /(cost of goods sold/365) =75000/(360000/365) = 76.04 days
The average collection period is the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer.
= days× account receivables/annual sales = (365×16000)/600000 =97.33 days.
Cashconversion cycle = inventory conversion cycle + average collection period - days payable outstanding
Days payable outstanding =25000/(360000/365)=25.34 days
Cadh conversion cycle =76.04+97.33 - 25.34 = 148 days.
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