Question

Consider the case of Teal Monkey Manufacturers: Teal Monkey Manufacturers is a mature firm that has...

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 $10,500,000
Cost of goods sold $7,140,000
Inventory $2,800,000
Accounts receivable $1,800,000
Accounts payable $2,800,000

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 answer the following questions. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.)

What is the value of the inventory conversion period?

57.79 days

63.87 days

143.14 days

54.75 days

Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs?

Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold.

Current assets should be divided by sales, but current liabilities should be divided by the COGS.

What is the average collection period?

62.57 days

24.63 days

25.81 days

22.29 days

What is the payables deferral period?

63.87 days

143.14 days

66.91 days

69.95 days

What is the cash conversion cycle?

26.98 days

62.57 days

28.15 days

25.81 days

Homework Answers

Answer #1

1.
Inventory conversion period = (Inventory / cost of goods sold) * 365
= ($2,800,000 / $7,140,000) * 365
= 143.14 days

Inventory conversion period = 143.14 days

2.
Average collection period = (Accounts receivable / credit sale) * 365
= ($1,800,000 / $10,500,000) * 365
= 62.57 days

3.
Payables deferral period = (Accounts payable / cost of goods sold) * 365
= ($2,800,000 / $7,140,000) * 365
= 143.14 days

4.
Cash conversion cycle = Inventory conversion period + Average collection period - Payables deferral period
= 143.14 + 62.57 - 143.14
= 62.57 days

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