Question

Suppose that Freddie's Fries has annual sales of $580,000; cost of goods sold of $455,000; average inventories of $17,000; average accounts receivable of $33,000, and an average accounts payable balance of $28,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle? (Round your answer to 2 decimal places.)

Answer 1

Cash cycles: 11.95 days

Step-by-step explanation:

Cash cycles shows the amount of time (in days) it takes a company to convert its investments in inventory to cash and caculated by following fomula:

Cash Conversion Cycle = Days Inventory Outstanding(DIO) + Days Sales Outstanding(DSO) – Days Payable Outstanding(DPO)

DIO = (Average inventories/cost of goods sold) x 365 = ($17,000/$455,000)x365 = 13.64 days

DSO = (average accounts receivable/credit sales)x365 = ($33,000/$580,000)x365 = 20.77 days

DPO = (average accounts payable/cost of goods sold)x365 = ($28,000/$455,000)x365 = 22.46 days

Cash cycles = DIO+DSO-DPO=13.64+20.77-22.46 = 11.95 days