Question

Consider the case of Teal Monkey Manufacturers:

Teal Monkey Manufacturers is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year:

Annual Sales	$9,500,000
Cost of goods sold	$6,650,000
Inventory	$2,900,000
Accounts receivable	$1,800,000
Accounts payable	$2,600,000

Teal Monkey’s CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.)

	Value
Inventory Conversion Period	159.17; 57.89; 41.35; or 49.62
Average collection period	26.01; 30.12; 69.16; or 21.90
Payables Deferral Period	42.02; 142.71; 56.84; or 51.90
Cash conversion cycle	85.62; 39.70; 6.39; or 29.77

Answer 1

Inventory conversion period is computed as shown below:

= (Inventory / cost of goods sold) x 365

= ($ 2,900,000 / $ 6.650,000) x 365

= 159.17 days Approximately

Average collection period is computed as follows:

= (Accounts receivable / Sales) x 365

= ($ 1,800,000 / $ 9,500,000) x 365

= 69.16 days Approximately

Payable deferral period is computed as follows:

= (Accounts payable / cost of goods sold) x 365

= ($ 2,600,000 / $ 6,650,000) x 365

= 142.71 days Approximately

Cash conversion cycle is computed as follows:

= Inventory conversion period + Average collection period - Payables deferral period

= 159.17 days + 69.16 days - 142.71 days

= 85.62 days