Question

Negus Enterprises has an inventory conversion period of 72 days, an average collection period of 46 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.

A) What is the length of the firm's cash conversion cycle?

B) If Negus's annual sales are $3,523,450 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar.

C) How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.

Answer 1

Answer of Part a:

Cash Conversion Cycle = Inventory Conversion Period + Average Collection Period – Payable Deferral Period
Cash Conversion Cycle = 72 days + 46 days – 25days
Cash Conversion Cycle = 93 days

Answer of Part b:

Average Collection Period = 365 * Accounts Receivable / Sales
46 = 365 * Accounts Receivable / $3,523,450
Accounts Receivable = 46 * $3,523,450 / 365
Accounts Receivable = $444,051

Answer of Part c:

Cost of Goods Sold = Sales* 80%
Cost of Goods Sold = $3,523,450 * 80%
Cost of Goods Sold = $2,818,760

Days of Inventory = 365 * Inventory / Cost of Goods Sold
72 = 365 * Inventory / $2,818,760
Inventory = 72 * $2,818,760 / 365
Inventory = $556,029.37

Inventory Turnover = Cost of Goods Sold / Inventory
Inventory Turnover = $2,818,760 / $556,029.37
Inventory turnover = 5.07times