Question

Problem 16-11
Cash Conversion Cycle

Negus Enterprises has an inventory conversion period of 62 days, an average collection period of 35 days, and a payables deferral period of 36 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.

1. What is the length of the firm's cash conversion cycle?
     days
   
2. If Negus's annual sales are $3,705,000 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)

Cash conversion cycle = Inventory period + Average collection period - payables deferral period

Cash conversion cycle = 62 + 35 - 36

Cash conversion cycle = 61 days

b)

Days on receivables = 365 / Receivables turnover

35 = 365 / Receivables turnover

Receivables turnover = 10.42857

Receivables turnover = Credit sales / Accounts receivables

10.42857 = 3,705,000 / Accounts receivables

Accounts receivables = 355,274

c)

Days of inventory = 365 / inventory turnover

62 = 365 / inventory turnover

inventory turnover = 5.89

It will turn over 5.89 times