Question

Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Annual sales = $45,000
Annual cost of goods sold = $30,000
Inventory = $4,500
Accounts receivable = $1,800
Accounts payable = $2,500

A. 28 days
B. 32 days
C. 35 days
D. 39 days
E. 43 days

Answer 1

Option (D) is correct.

Step-by-step explanation:

Inventory conversion period:

= (365 days × Inventory) ÷ Cost of goods sold

= (365 days × 4,500) ÷ 30,000

= 54.75

Average collection period:

= (365 days × Accounts receivable) ÷ sales

= (365 days × $1,800) ÷ 45,000

= 14.60

Payable deferral period:

= (365 days × Accounts payable) ÷ COGS

= (365 days × $2,500) ÷ 30,000

= 30.42

cash conversion cycle:

= Inventory conversion period + Average collection period - Payable deferral period

= 54.75 + 14.60 - 30.42

= 38.93 or 39 days