Question

Parramore Corp has $12 million of sales, $2 million of inventories, $3.5 million of receivables, and $1.25 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at a 7% rate. Assume 365 days in year for your calculations.

1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days

Answer 1

The cash conversion cycle (CCC) is a measure that shows how long it takes for a company to convert its resources, such as inventory and receivables, into cash. To calculate the CCC, you need to determine the number of days it takes for each component of the cycle. In this case, Parramore Corp's CCC is approximately 134 days.

Step-by-step explanation:

The cash conversion cycle (CCC) is a measure that shows how long it takes for a company to convert its resources, such as inventory and receivables, into cash. To calculate the CCC, you need to determine the number of days it takes for each component of the cycle.

1. First, calculate the Inventory Conversion Period (ICP) by dividing the average inventories by the cost of goods sold (COGS) per day. COGS per day is found by dividing the annual COGS by 365.
2. Next, calculate the Receivables Conversion Period (RCP) by dividing the average accounts receivable by the sales per day. Sales per day is found by dividing the annual sales by 365.
3. Finally, calculate the Payables Deferral Period (PDP) by dividing the average accounts payable by the cost of goods sold per day. COGS per day is found by dividing the annual COGS by 365.

Once you have the ICP, RCP, and PDP, you can calculate the CCC by subtracting the PDP from the sum of ICP and RCP.

In this case, the average inventories are $2 million, and the COGS is 75% of sales, so the COGS per day is $27,397.26. The ICP is calculated by dividing $2 million by $27,397.26, which gives approximately 73 days.

The average accounts receivable is $3.5 million, and the sales per day is calculated by dividing $12 million by 365, which gives approximately $32,876.71. The RCP is calculated by dividing $3.5 million by $32,876.71, which gives approximately 107 days.

The average accounts payable is $1.25 million, and the PDP is calculated by dividing $1.25 million by $27,397.26, which gives approximately 46 days.

Therefore, the CCC is calculated by subtracting the PDP (46 days) from the sum of the ICP (73 days) and RCP (107 days), which gives approximately 134 days.