Question

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. What is the length of the firm's cash conversion cycle? If Negus' 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. 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 = days inventory outstanding + days sales outstanding - days payable outstanding

Cash conversion cycle = 62 + 35 - 36

Cash conversion cycle = 61 days

b)

Days of sales outstanding = 365 / Inventory turnover ratio

35 = 365 / receivables turnover ratio

receivables turnover ratio = 10.4286

receivables turnover ratio = net credit sales / average receivables

10.4286 = 3,705,000 / Average receivables

Average receivables = $355,2723

c)

Inventory conversion period = 365 / inventory turnpover ratio

62 = 365 / inventory turnpover ratio

inventory turnpover ratio = 5.89 times

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