Question

Mello is a retailer of fashionable merchandise. The firm turns its inventory 5 times each year and has an average collection period of 37 days. The firm’s annual sales are $4.2 million, its cost of goods sold represents 72% of sales, and its purchases represent 81% of the cost of goods sold. The firm’s accounts payable total $0.6 million. Assume a 365-day year.

Calculate the firm’s cash conversion cycle. Give your answer in days, rounded to 1 decimal place.

Please give a step-by-step answer and clearly explain the problem solving process.

Answer 1

Inventory turnover = 5 times

Inventory period days = 365/inventory turnover

=365/5 =73

Average collection period = 37 days

Cost of goods sold = sales * cost of goods sold%

=4200000*72%

=3024000

purchases = cost of goods sold * % of purchases

=3024000*81%

=2449440

Accounts payable period = 365/purchases* accounts payable

=365/2449440*600000

=89.40819126

Cash conversion cycle period formula = Average collection period + inventory period - accounts payable period

=37+73-89.40819126

=20.59180874

So cash conversion cycle is 20.6 days