Question

Problem 16-11
Cash Conversion Cycle

Negus Enterprises has an inventory conversion period of 80 days, an average collection period of 47 days, and a payables deferral period of 33 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.

1. What is the length of the firm's cash conversion cycle?
   days
   
2. If Negus's annual sales are $3,693,025 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar. Do not round intermediate calculation.
   $   
   
3. How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places. Do not round intermediate calculation.
   x

Answer 1

(a)- Firm's cash conversion cycle

Firm's cash conversion cycle = Inventory Conversion period + Average Collection period – Payables deferral period

= 80 Days + 47 Days – 33 Days

= 94 Days

“Firm's cash conversion cycle = 94 Days”

(b)- Firm's investment in accounts receivables

Firm's investment in accounts receivables = Annual sales x (Average collection period / 365 Days)

= $36,93,025 x (47 / 365)

= $475,540

“Firm's investment in accounts receivables = $475,540”

(c)-Inventory Turnover Ratio

Inventory Turnover Ratio = Number of days in a year / Inventory Conversion Period

= 365 Days / 80 Days

= 4.56 Times per year

“Inventory Turnover Ratio = 4.56 Times per year”