Question

Problem 16-11
Cash Conversion Cycle

Negus Enterprises has an inventory conversion period of 72 days, an average collection period of 50 days, and a payables deferral period of 29 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 $3,757,625 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar. Do not round intermediate calculation.
   $   
   
3. How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places. Do not round intermediate calculation.
   x

Answer 1

(a)- Firm's cash conversion cycle

Firm's cash conversion cycle = Inventory Conversion period + Average Collection period – Payables deferral period

= 72 Days + 50 Days – 29 Days

= 93 Days

“Firm's cash conversion cycle = 93 Days”

(b)- Firm's investment in accounts receivables

Firm's investment in accounts receivables = Annual sales x (Average collection period / 365 Days)

= $37,57,625 x (50 / 365)

= $5,14,743

“Firm's investment in accounts receivables = $5,14,743”

(c)-Inventory Turnover Ratio

Inventory Turnover Ratio = Number of days in a year / Inventory Conversion Period

= 365 Days / 72 Days

= 5.07 Times

“Negus Enterprises turn over its inventory 5.07 per year”