Question

Sempurna Manufacturing Company (SMC) has an average accounts receivable balance of RM1,250,000, an average inventory balance of RM1,750,000, and an average accounts payable balance of RM800,000. Its annual sales are RM12,000,000 and its cost of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year. What is SMC’s cash conversion cycle?

"hopefully the answer without using excel"

Answer 1

Annual Sales = RM 12000000, Cost of Goods Sold (COGS) = 80 % of Annual Sales = 0.8 x 12000000 = RM 9600000

Days Sales Outstanding (DSO) = [365 / (Net Sales / Average Accounts Receivable)] = [365 / (12000000 / 1250000)] = 38.0208 days ~ 38 days

Days Inventory Outstanding (DIO) = [365 / (COGS / Average Inventory Balance)] = [365 / (9600000 / 1750000)] = 66.536 days ~ 67 days

Days Payable Outstanding (DPO) = [365 / (COGS / Average Accounts Payable)] = [365 / (9600000 / 800000)] = 30.4167 days ~ 31 days

Cash Conversion Cycle = DSO + DIO - DPO = 38 + 67 - 31 = 74 days