Question

Winston Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash conversion cycle. Winston's 2015 sales (all on credit) were $190,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.06 times during the year. Its receivables balance at the end of the year was $13,145.01 and its payables balance at the end of the year was $7,416.42. Using this information calculate the firm's cash conversion cycle. Round your answer to the nearest whole. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations.

Answer 1

Sales = $190,000

Cost of goods sold = $190,000 x 75% = $142,500

Inventory turnover = Sales / inventory = 8.06

or, Inventory = $190,000 / 8.06 = $23,573.2009925

Days sales in inventory (DSI) = (Inventory / Cost of goods sold) x 365 days

or, DSI = ($23,573.2009925 / $142,500) x 365 days = 60.380479 days or 60 days

Days sales outstanding (DSO) = (Accounts receivable / Sales) x 365 days = ($13,145.01 / $190,000) x 365 days = 25.252256 days or 25 days

Days payables outstanding (DPO) = (Accounts payable / Cost of goods sold) x 365 days = ($7416.42 / $142500) x 365 days = 18.995 days or 19 days

Cash Coversion cycle = DSI + DSO - DPO = 60 days + 25 days - 19 days = 66 days