Question

2. Pizza di Joey operates several food trucks that provide hot food and beverages in the Washington DC area. The company has annual sales of $625,400. Cost of goods sold average 32 percent of sales and the profit margin is 4.5 percent. The average accounts receivable balance is $34,700. (1) On average, how long does it take the company to collect payment for its services? (2) The payables turnover has gone from an average of 10.50 times to 11.45 times per year. How does this affect the inventory period? (3) What is the length of the company's cash conversion cycle after the change in the payables period if the inventory turnover is 22.20 times? Assume 365 days per year.

Answer 1

1) On average, how long does it take the company to collect payment for its services?

Days to collect payment = average receivables / annual sales x 365 = 34,700 / 625,400 x 365 =  20.25 days

(2) The payables turnover has gone from an average of 10.50 times to 11.45 times per year. How does this affect the inventory period?

Payables turnover is not known to impact inventory holding in any way. Hence there should be no affect on the inventory period.

(3) What is the length of the company's cash conversion cycle after the change in the payables period if the inventory turnover is 22.20 times?

The length of the company's cash conversion cycle = Inventory holding period + Days sales outstanding - average payment period = 365 / Inventory turnover + 20.25 (from part (1)) - 365 / payables turnover = 365 / 22.20 + 20.25 - 365 / 11.45 =  4.81 days