Black Sheep Broadcasting Company is a mature firm that has a stable flow of busi
ID: 2798917 • Letter: B
Question
Black Sheep Broadcasting Company is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year: Annual sales Cost of goods sold Inventory Accounts receivable Accounts payable $9,900,000 $6,930,000 $2,700,000 $1,900,000 $2,600,000 Black Sheep Broadcasting'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. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value ! Inventory Conversion Period Average collection period Payables Deferral Period Cash conversion cycle | | 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? 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. Current assets should be divided by sales, but current liabilities should be divided by the COGSExplanation / Answer
Inventory Conversion Period = 365 / (COGS / Inventory) = 365 / (6,930,000 / 2,700,000) = 142.21 days
Average collection period = 365 / (Sales / Receivables) = 365 / (9,900,000 / 1,900,000) = 70.05 days
Payables period = 365 / (COGS / Payables) = 365 / (6,930 / 2,600) = 136.94 days
Cash Conversion Cycle (CCC) = Inventory Period + Collection Period - Payable period
CCC = 142.21 + 70.05 - 136.94 = 75.32 days
The first statement is correct. As inventory and payables are based on cost, while receivables are based on sales, we use them accordingly.
The payables period also needs to be considered and hence, the first statement is correct.
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