Question

Nexus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days and a payables deferral period of 25 days. assume that cost of goods sold is 80% of sales.

1 what is the length of the firms cash conversion cycle?

2 if annual sales are 4380000 dollars and all sales are on credit what is the firm's investment in accounts receivable?

3 how many times per year does negus Enterprises turn over its inventory?

Answer #1

1.

Inventory Conversion Period = 50 days

Average collection period = 35 days

Payables deferral period = 25 days

Cash Conversion Cycle = Inventory Conversion Period + Average
collection period - Payables deferral period

= 50 + 35 - 25

**Cash Conversion Cycle = 60 days**

2.

Annual Credit Sales = 4,380,000

Average Collection Period = Accounts Receivables / Total Credit
Sales * No. of days in a year

35 = Accounts Receivables/4380000 * 365

Accounts Receivables = 35/365 * 4380000

**Accounts Receivables** = **420000**

Hence the firm's **investment in accounts
receivables** when the sale is $4,380,000 is
**$420,000**

3.

Inventory Turnover = 365/Inventory Conversion Period

= 365/50

**Inventory Turnover = 7.3 times**

**Hence the company turn over its inventory 7.3 times a
year**

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