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