Question

Quantitative Problem: Winston Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash conversion cycle. Winston's 2017 sales (all on credit) were $162,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.13 times during the year. Its receivables balance at the end of the year was $13,152.57 and its payables balance at the end of the year was $7,418.95. Using this information calculate the firm's cash conversion cycle. Assume a 365-day year. Do not round intermediate calculations. Round your answer to one decimal place.

Answer 1

Annual Sales = $162,000

Cost of Goods Sold = 75% * $162,000
Cost of Goods Sold = $121,500

Days Inventory Outstanding = 365 / Inventory Turnover
Days Inventory Outstanding = 365 / 8.13
Days Inventory Outstanding = 44.90 days

Days Sales Outstanding = 365 * Receivables / Annual Sales
Days Sales Outstanding = 365 * $13,152.57 / $162,000
Days Sales Outstanding = 29.63 days

Days Payable Outstanding = 365 * Accounts Payable / Cost of Goods Sold
Days Payable Outstanding = 365 * $7,418.95 / $121,500
Days Payable Outstanding = 22.29 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
Cash Conversion Cycle = 44.90 + 29.63 - 22.29
Cash Conversion Cycle = 52.24 days