Question

You have recently been hired to improve the performance of Multiplex Corporation which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 360-day year, what is your estimate of the firm's current cash conversion cycle?

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Current inventory = $125,000

Annual sales = $600,000

Accounts receivable = $160,000

Accounts payable = $25,000

Total annual purchases = $360,000

Purchases credit terms: net 30 days

Receivables credit terms: net 50 days

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	a.	191 days
	b.	100 days
	c.	143 days
	d.	196 days
	e.	168 days

Answer 1

Inventory Conversion period = ( Inventory / Total annual purchases ) * Days in a year = ( 125000/360000 ) * 360	125
Average collection period = ( Accounts receivable / Annual sales ) * Days in a year = ( 160000/600000 ) * 360	96
Payables deferral period = ( Accounts payable / Total annual purchases ) * Days in a year = ( 25000 / 360000 ) * 360	25
Cash conversion cycle = Inventory conversion period + Average collection period - Payables deferral period	196