Question

Siren Inc. has annual sales of $85,000,000, COGS of $75,000,000, 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 33 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.	–28.0
	b.	–29.5
	c.	–30.2
	d.	–27.4

Answer 1

CCC = DSO + DIO - DPO

Original:

DSO = [Average Accounts Receivable/Sales] * 365

= [$16,000,000/$85,000,000] * 365 = 68.71 days

DIO = [Average Inventory/COGS] * 365

= [$20,000,000/$75,000,000] * 365 = 97.33 days

DPO = 33 days

CCC = 68.71 + 97.33 - 33 = 133.04 days

Revised:

DSO = [Average Accounts Receivable/Sales] * 365

= [($16,000,000-$2,000,000)/$85,000,000] * 365 = 60.12 days

DIO = [Average Inventory/COGS] * 365

= [($20,000,000-$4,000,0000)/$75,000,000] * 365 = 77.87 days

DPO = 33 days

CCC = 60.12 + 77.87 - 33 = 104.98 days

Change in CCC = Revised - Original = 104.98 - 133.04 = -28.05 days

So, option "a" is correct.