Practice calculations and problem-solving methods

Cash Conversion Cycle

Carroll & King Corporation has $5 million of inventory and $2 million of accounts receivable. Its average daily sales are $120,000. The company's payables deferral period (accounts payable divided by daily purchases) is 30 days. What is C&K's cash conversion cycle?

The cash conversion cycle is the Inventory conversion cycle + avg collection period -- payables deferred.

Thus, this is:

($5,000,000 / 120,000) + (2,000,000 / 120,000) --

(16.4) Sales collections

Schoof Inc. expects to have sales of $30,000 in January, $35,000 in February, and $40,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month following the sale, and another 40% are credit sales paid 2 months following the sale, what are the cash receipts for the firm in March?

a.

$29,151

b.

$30,685

c.

$32,300

d.

$34,000

e.

$35,700

(40%)(30,000) + (40%)(35,000) + (20%)($40,000)

+ 14 + 8 = $34,000

(16.7) Accounts receivable balance

3.

Bello Inc. had sales of $2,500,000 per year (all credit,) and its days sales outstanding was DSO = 35 days. What was its average amount of accounts receivable outstanding, based on a 365-day year?

a.

$239,726

b.

$251,712

c.

$264,298

d.

$277,513

e.

$291,388

35 / 365 = .09589 times the amount of sales.

So .09589 * $2,500,000

$239,726

(16.1) Inventory conversion period

4.

On average, Bragg Inc. has sales of $2,000,000 per month. It keeps inventory equal to 50% of its monthly sales on hand at all times. Based on using a 365-day year, what is the inventory conversion period?

a.

11.7

b.

13.0

c.

14.4

d.

15.2

e.

16.7

The inventory conversion period is the inventory / COGS per day

The inventory is $2,000,000 * 50% = $1,000,000

COGS/day would be $24,000,000 in sales / 365 = $65,753

So $1,000,000 / 65,753 = 15.2

(16.1) Cash conversion cycle

5.

Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000; and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days, and it pays on time. The firm is searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000, by how many days would the cash conversion cycle be changed? Use a 365-day year.

a.

-27.4

b.

-28.7

c.

-30.2

d.

-31.7

e.

-33.3

The cash conversion cycle is inventory conversion cycle + a/R cycle -- a/P cycle.

The old cash conversion cycle must first be determined.

(20,000,000 / 219178) + (16,000,000 / 219178) -- 35

= 91.25 + 73 -- 35 = 129.25

The new cash conversion cycle must first be determined.

(16,000,000 / 219178) + (14,000,000 / 219178) -- 35

73 + 63.87 -- 35 = 101.87

The difference is the degree to which the cash conversion cycle is shortened: 129.25 -- 101.87 = 27.38