Question

The Garcia Industries balance sheet and income statement for the year ended Year 1 are as...

The Garcia Industries balance sheet and income statement for the year ended Year 1 are as follows:

Balance Sheet
(in Millions of Dollars)
Assets Liabilities and Stockholders’ Equity
Cash $5.0 Accounts payable $8.0
Accounts receivable 16.0 Salaries, benefits, and payroll taxes payable 2.0
Inventories* 13.0 Other current liabilities 13.0
Fixed assets, net 31.0 Long-term debt 16.0
$65.0 Stockholders’ equity 26.0
$65.0
*The average inventory over the past two years also equals $13.0 million.
Income Statement
(in Millions of Dollars)
Net sales $120.0
Cost of sales 56.0
Selling, general, and administrative expenses 30.0
Other expenses 14.0
Earnings after tax $x.0

Assume that there are 365 days per year. All sales are credit sales. Round to the second decimal place.

  • Determine the length of the inventory conversion period.  days
  • Determine the length of the receivables conversion period.   days
  • Determine the length of the operating cycle.   days
  • Determine the length of the payables deferral period. Use = (AP + SP) / (COS + SG&A)*365  days
  • Determine the length of the cash conversion cycle.  days
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Homework Answers

Answer #1

a)
Inventory conversion period = Inventory / (cost of goods sold / 365)
= $13 / ($56 / 365)
= 84.73 days

b)
Receivables conversion period = Accounts receivables / (credit sales / 365)
= $16 / ($120 / 365)
= 48.67 days

c)
Operating cycle = Inventory conversion period + Receivable conversion period
= 84.73 + 48.67
= 133.40 days

d)
Payables deferred period = (AP + SP) / (COS + SG&A) *365
= ($8 + $2) / ($56 + $30) * 365
= $10 / $86 * 365
= 42.44 days

e)
Cash conversion cycle = Operation cycle - Payables deferred period
= 133.40 - 42.44
= 90.96 days

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