Question

The simplified balance of the Greek Connection is shown below. It had sales and a cost of goods sold as shown in last rows of the Table.

THE GREEK CONNECTION
Balance Sheet
As of December 31, 2015
(thousands of dollars)
Assets			Liabilities and Equity
Cash	2200		Accounts payable	1500
Accounts receivable	3950		Notes payable	1000
Inventory	1300		Accruals	1220
Total current assets	7450		Total current liabilities	3720
Net plant, property			Long-term debt	3200
and equipment	8500		Total liabilities	6820
Total Assets	15950		Common equity	9030
			Total liabilities and equity	15950
Sales	32000
Cost of Goods Sold	22000

a. Calculate The Greek Connection’s net working capital in 2015.

Answer: the net working capital in 2015 is $. (round to full $, no decimals)

b. Calculate the cash conversion cycle of The Greek Connection in 2015. Assume 365 days/year for b. and c.

Answer: the cash conversion cycle is  days. (round to one decimal)

c. The industry average days sales outstanding ratio is 22 days. What would the cash conversion cycle for The Greek Connection have been in 2015 had it matched the industry average days sales outstanding?

Answer: the cash conversion cycle would be  days. (round to one decimal)

Answer 1

Part a)

As we are calculating the net working capital of 2015, we dont consider account receivable in current assets as we are not going to receive them this year.

Net working capital = Current assets - Current liabilities

= (7450 - 3950) - 3720

= -220 $

Part b)

Cash conversion cycle = Days of inventory outstanding + Days of sales outstanding + Days payables outstanding

Days of inventory outstanding = Inventory/cost of goods sold = 1300/22000 = 0.0591

Days of sales outstanding = Account receivable/ revenue per day = 3950/(32000/365) = 45.055

Days payables outstanding = Account payable / Cost of goods sold per day = 1500/(22000/365) = 24.89

Thus, Cash conversion cycle = 0.0591+45.055+24.89 = 70 days

Part c)

If the value of days of sales outstanding was 22 days, from the previous part, we can calculate the following:

Cash conversion cycle = 0.0591+22+24.89 = 46.9 days