Question

Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Annual sales =	$45,000
Annual cost of goods sold =	$30,000
Inventory =	$4,500
Accounts receivable =	$1,800
Accounts payable =	$2,500

Answer 1

Sales Per Day = Annual Sales / 365

=45000/365 = $ 123.29 a Day

Cost Of Goods Sold Per Day = Annual Cost of Goods Sold /365

=30000/365 = $82.19 a day

Cash Conversion Cycle = Inventory Conversion Period + Average Collection Period - Average Accounts Payable.

Inventory Conversion Period = Inventory / Cost Of Goods Sold Per Day

= 4500/82.19 = 54.75

Average Collection Period = Accounts Receivable / Sales Per Day

= 1800 /123.29 = 14.60

Average Accounts Payable = Accounts Payable / Cost of Goods Sold

=2500/82.19 = 30.42

Cash Conversion Cycle = Inventory Conversion Period + Average Collection Period - Average Accounts Payable.

Substituting Values We get

Cash Conversion Cycle = 54.75 +14.60-30.42

= 38.93 rounded to 39 Days

Therefore Cash Conversion Cycle =39 Days