Question

(1) Use the information below to compute the number of days in the cash conversion cycle for each company.
(2) Which company is more effective at managing cash?
  

	Spartan Co.				Chen Co.
Days' sales in accounts receivable		42				55
Days' sales inventory		25				29
Days' sales in accounts payable		32				37

	Spartan Co.	Chen Co.
Cash to cash conversion cycle

More Effective Cash Management

   

Answer 1

Part 1 ) Calculation of Cash Conversion Cycle

Cash Conversion Cycle= Days inventory outstanding + Days accounts receivable outstanding- Days Accounts Payable outstanding

	Spartan Co.	Chen Co
Days inventory outstanding	25	29
Add:-Days accounts receivable outstanding	42	55
Less:-Days Accounts Payable outstanding	32	37
Cash Conversion Cycle(days)	35	47

Part 2) More Effective Cash Management is of Spartan Co since it has less  Cash Conversion Cycle of 35 days, means cash can be converted to enhance the liquidity of company faster than Chen Co