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 2013 sales (all on credit) were $191,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.53 times during the year. Its receivables balance at the end of the year was $13,106.24 and its payables balance at the end of the year was $7,396.1. Using this information calculate the firm's cash conversion cycle. Round your answer to the nearest whole. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations.
  days

Answer 1

Cash conversion cycle = 49 days

Explanation;

Note: 365 days in the year taken. If you take 360 days then answer will be different. Nothing is said in question hence I took 365 days.

Cash conversion cycle = DIO + DSO – DPO

Days Inventory Outstanding (DIO) = 365 / 8.53 = 42.79 days OR 43 days

Days Sales Outstanding (DSO) = $13106.24 * 365 / $191000 = 25.04 days OR 25 days

Days Payable Outstanding (DPO) = $7396.10 * 365 / $143250 = 18.84 days OR 19 days

Hence, Cash conversion cycle = 43 days + 25 days – 19 days

= 49 days