Question

Cash Conversion Cycle

Negus Enterprises has an inventory conversion period of 60 days, an average collection period of 48 days, and a payables deferral period of 27 days. Assume that cost of goods sold is 80% of sales. Assume a 365-day year. Do not round intermediate calculations.

1. What is the length of the firm's cash conversion cycle? Round your answer to the nearest whole number.

   ___days

2. If annual sales are $4,124,500 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar.

   ____$  

3. How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.

   _____ ×

Answer 1

a. The length is computed as shown below:

= inventory conversion period + average collection period - payables deferral period

= 60 days + 48 days - 27 days

= 81 days

b. The accounts receivable is computed as shown below:

= (Average collection period x Annual sales) / 365 days

= (48 days x $ 4,124,500) / 365 days

= $ 542,400

c. The times per year is computed as shown below:

= 365 days / inventory conversion period

= 365 / 60

= 6.08 Approximately

Feel free to ask in case of any query relating to this question