Question

Quantitative Problem: 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 $187,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.46 times during the year. Its receivables balance at the end of the year was $13,132.08 and its payables balance at the end of the year was $7,419.8. 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.
______days

Answer 1

Cash converison cycle = days inventory outstanding + days sales outstanding - days payable outstanding

Days inventory outstanding = 365 / inventory ratio

Days inventory outstanding = 365 / 8.46

Days inventory outstanding = 43 days

Receivables turnover ratio = net credit sales / receivables

Receivables turnover ratio = 187,000 / 13,132.08

Receivables turnover ratio = 14.24 times

days sales outstanding = 365 / 14.24

days sales outstanding = 26 days

Payables turnoevr ratio = cost of goods sold / accounts payable

Payables turnoevr ratio = 0.75 * 187,000 / 7,419.8

Payables turnover ratio = 140,250 / 7,419.8

Payables turnover ratio = 19 days

Cash converison cycle = 43 + 26 - 19

Cash converison cycle = 50