Question

Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365 day year, what is the firm's present cash conversion cycle? Enter your answer rounded to two decimal places. For example, if your answer is 123.45% or 1.2345 then enter as 1.23 in the answer box. Average Inventory = $80,000.00 Annual Sales = $625,000.00 Annual Cost of Goods Sold = $350,000.00 Average Accounts Receivable = $170,000.00 Average Accounts Payable = $30,000.00

Answer 1

The cash conversion cycle is computed as shown below:

= Days sales outstanding + days of inventory outstanding - days of payable outstanding

Days sales outstanding is computed as follows:

= (Average accounts receivable / Annual Sales) x 365

= ($ 170,000 / $ 625,000) x 365

= 99.28 days

Days of inventory outstanding is computed as follows:

= (Average Inventory / Cost of Goods Sold) x 365

= ($ 80,000 / $ 350,000) x 365

= 83.42857143 days

Days of payable outstanding is computed as follows:

= (Average Accounts Payable / Cost of Goods Sold) x 365

= ($ 30,000 / $ 350,000) x 365

= 31.28571429 days

So, the cash conversion cycle is computed as follows:

= 99.28 days + 83.42857143 days - 31.28571429 days

= 151.42 days Approximately

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