Question

Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the following firm:

Income statement data:

Sales 5,000

Cost of goods sold 4,200

Balance sheet data:

Inventory 550

Accounts receivable 110

Accounts payable 270

Answer 1

Days Inventory outstanding = 365 days * (Inventory / Cost of goods sold) = 365 days * ($550/$4,200)

Days Inventory outstanding = 47.80 days

Days sales outstanding = 365 days * (Accounts receivable / Sales) = 365 days * ($110/$5,000)

Days sales outstanding = 8.03 days

Days Payable outstanding = 365 days * (Accounts payable / Cost of goods sold) = 365 * (270/4,200)

Days Payable outstanding = 23.46 days

Cash conversion cycle = Days Inventory outstanding + Days sales outstanding - Days Payable

outstanding

Cash conversion cycle = 47.80 + 8.03 - 23.46

Cash conversion cycle = 32.37 days