1. AZ Inc. had credit sales of $6,500,000 last year and its days sales outstandi
ID: 2806185 • Letter: 1
Question
1. AZ Inc. had credit sales of $6,500,000 last year and its days sales outstanding was DSO = 50 days. What was its average receivables balance, based on a 365-day year?
2. Firm Q has $350 million of sales, $60 million of inventories, $70 million of receivables, and $45 million of payables. Its cost of goods sold is 75% of sales. Calculate its current cash conversion cycle based on the available information.
3. Estimate the cash conversion cycle based on the following available information. Revenue = $235 million Cost of goods sold = $211.5 million Account receivables = $65 million Inventories = $100 million Account payables = $80 million
4. A company has a days sales outstanding (DSO) of 80 days (on a 365-day basis per year). All sales are on credit. It has an account receivable of $120 million and inventory of $150 million. a) What is the inventory turnover ratio? b) If the payables deferral period is 65 days, what is the length of the cash conversion cycle?
Explanation / Answer
(1).
Formuls of days sales outstanding (DSO) is as follow;
DSO = Average Accounts receivable * 365 / Net credit sales
Now let’s put the values in this formula;
50 = Average Accounts receivable * 365 / $6500000
Thus Average Accounts Receiveble will be;
$6500000 * 50 / 365
= $890410.96 (Approx.)
(2).
Formuls of Cash conversion cycle is as follow;
Cash conversion cycle = (DSO + DIO – DPO)
Note: It is assumed that there is 365 days in the year.
So we have to calculate each one by one;
DSO = Average Accounts Receivable * 365 / Credit Sales
= 70 million * 365 / 350 million
DSO = 73 days
DIO = Average Inventory * 365 / Cost of goods sold
= 60 million * 365 / 262.50 million
DIO = 83.43 days
DPO = Average Accounts Payable * 365 / Cost of goods sold
= 45 million * 365 / 262.50 million
DPO = 62.57 days
Thus Cash conversion cycle = (73 days + 83.43 days – 62.57 days)
= 93.86 days (Approx.)
(3).
Formuls of Cash conversion cycle is as follow;
Cash conversion cycle = (DSO + DIO – DPO)
Note: It is assumed that there is 365 days in the year.
So we have to calculate each one by one;
DSO = Average Accounts Receivable * 365 / Credit Sales
= 65 million * 365 / 235 million
DSO = 100.96 days
DIO = Average Inventory * 365 / Cost of goods sold
= 100 million * 365 / 211.50 million
DIO = 172.58 days
DPO = Average Accounts Payable * 365 / Cost of goods sold
= 80 million * 365 / 211.50 million
DPO = 138.06 days
Thus Cash conversion cycle = (100.96 days + 172.58 days – 138.06 days)
= 135.48 days (Approx.)
(4).
(a).
Formula of inventory turnover ratio is as follow;
Sales or cost of goods sold / Inventory
Thus first of all we will have to calculate amount of sales with the help of the formula of DSO;
Formuls of days sales outstanding (DSO) is as follow;
DSO = Average Accounts receivable * 365 / Net credit sales
Now let’s put the values in this formula;
80 = 120000000 * 365 / Net credit sales
Thus Net credit sales will be;
$120000000 * 365 / 80
= $547500000 or 547.50 (million)
Now let’s calculate inventory turnover ratio;
547.50 million / 150 million
= 3.65 Times
(b).
Cash conversion cycle will be calculated as follow;
Formuls of Cash conversion cycle is as follow;
Cash conversion cycle = (DSO + DIO – DPO)
So we have to calculate each one by one;
DSO = 80 days (It is given in the question.)
DIO = Average Inventory * 365 / Cost of goods sold
= 150 million * 365 / 547.50 million
DIO = 100 days
DPO = 65 days (It is given in the question.)
Thus Cash conversion cycle = (80 days + 100 days – 65 days)
= 115 days
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