Question

A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle

Answer 1

The cash conversion cycle (CCC) is 45 days, calculated by adding the inventory conversion period of 60 days and receivables collection period of 15 days, and then subtracting the payables deferral period of 30 days.

Step-by-step explanation:

The cash conversion cycle (CCC) is an important metric used in business to understand how long it takes a company to convert its investments in inventory and other resources into cash flows from sales. The cash conversion cycle is calculated by adding the inventory conversion period (the amount of time required to sell inventory), the receivables collection period (the time required to collect receivables from customers), and then subtracting the payables deferral period (the time the company has to pay its suppliers).

In this scenario, the company's inventory conversion period is given as 60 days. The receivables collection period corresponds to the terms on which the company sells to its customers, which is net 15 days. The payables deferral period corresponds to the terms provided by the suppliers to the company, which is net 30 days.

Using the formula:

• Inventory Conversion Period = 60 days
• Receivables Collection Period = 15 days
• Payables Deferral Period = 30 days

CCC = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

CCC = 60 days + 15 days - 30 days

CCC = 45 days

Therefore, the company's cash conversion cycle is 45 days.

Answer 2

The company's cash conversion cycle is 75 days

Step-by-step explanation:

The conversion cycle is the number of days that a business takes to convert its investment in inventory into cash flowing from the purchase and sales of the business.

Conversion cycle = Payable days + Inventory in Stock days + Receivable days

where

Payable days = Purchases term = 30 days

Inventory in stock = Number of days until inventory remains unsold = 60 - 30 days = 30 days ( As payable days are already included in inventory conversion days )

Receivable days = Sales term = 15 days

Placing values in the formula

Conversion cycle = 30 days + 30 days + 15 days

Conversion Cycle = 75 days