Question

1. You have the following information:

Accounts receivable                       $160,000

Total credit sales $2,500,000

Assume a 360 day year and compute the receivables collection period.

2.Inventory conversion period 15 days

Closing inventory $28,000

Compute C O G S (assuming a 360 day year).

3.Inventory conversion period                      68.2 days

Receivables collection period 35.8 days

Payables deferral period 24.6 days

Compute the cash conversion cycle:

4.Inventory conversion period 55.8 days

Days sales outstanding 23.9 days

Days payables outstanding 32.5 days

The cash conversion cycle is:?

Answer 1

1) Receivables collection period = (Accounts receivables / Total credit sales) x 360 days = ($160,000 / $2,500,000) x 360 days = 23.04 days

2) Inventory collection period = (Closing inventory / COGS) x 360 days

or, 15 days = ($28000 / COGS) x 360 days

or, COGS = $672,000

3) Cash Coversion cycle = Inventory conversion period + Receivables collection period - payables deferral period = 68.2 days + 35.8 days - 24.6 days = 79.4 days

4) Cash conversion cycle = Inventory conversion period + Days sales outstanding - Days payable outstanding = 55.8 days + 23.9 days - 32.5 days = 47.2 days

Receivables collection period is also called Days sales outstanding. Payables deferral period is also called Days payables outstanding.