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ABC Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle?
Average inventoy= 75,000
Annual sales= 600,000
Annual cost of goods sold= 360,000
Average accounts receivable= 160,000
Average accounts payable= 25,000

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mltn1980

Answer:

CCC - Cash Conversion Cycle   148,03  Days

Explanation:

The Cash Conversion Cycle it's the sum of "Days of Inventory Outstanding".

"Days Sales Outstanding" and "Days Payables Outstanding"

CCC - Cash Conversion Cycle : 76,04 + 97,33 + 25,35 = 148,03

  • Days of Inventory Outstanding

It's calculated by dividing Average Inventory by Cost of Goods,

and that result multiplied by 365

  • Days Sales Outstanding

It's calculated by dividing Accounts Receivable by Sales,

and that result multiplied by 365

  • Days Payables Outstanding

It's calculated by dividing Accounts Payables by Cost of Goods,

and that result multiplied by 365

CCC - Cash Conversion Cycle   148  

DIO - Days of Inventory Outstanding  76,04   = 75,000/360,000*365

Average Inventory  75,000  

Cost Of Goods  360,000  

DSO - Days Sales Outstanding  97,33  = $160,000/$600,000*365

Accounts Receivable  160,000  

Sales  600,000  

DPO - Days Payables Outstanding  25,35 = $25,000/$360,000*365

Accounts Payables  25,000  

Cost Of Goods  360,000  

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