Question

A company's Cash Conversion Cycle is the length of time (in days) between when the company pays for inventory that it purchases and when it collects cash from a customer from sale of the inventory. Turnova Pic sells solely on credit. How long was the company's Cash Conversion Cycle (Working Capital Gap) in rounded days if its key financial ratios were; Inventory turnover of 3.5; Receivable turnover of 8.7; and Payable turnover of 2.9?

a. 20 days
b. 64 days
c. 23 days
d. 37 days

Answer 1

To calculate the Cash Conversion Cycle, Inventory Days, Receivables Days, and Payables Days were determined using the provided financial turnover ratios. The calculated CCC is approximately 20.38 days, which when rounded, indicates a Cash Conversion Cycle of 20 days.

Step-by-step explanation:

The question pertains to calculating the Cash Conversion Cycle (CCC) of a company. The CCC is the period of time it takes for a company to convert its investment in inventory and other resources into cash flows from sales. To calculate the CCC, we need to find the Inventory Days, Receivables Days, and Payables Days using the given turnover ratios.

Here are the formulas for each component of the CCC:

• Inventory Days = 365 / Inventory Turnover
• Receivables Days = 365 / Receivables Turnover
• Payables Days = 365 / Payables Turnover

Using the provided turnover ratios, we calculate the following:

• Inventory Days = 365 / 3.5 ≈ 104.29 days
• Receivables Days = 365 / 8.7 ≈ 41.95 days
• Payables Days = 365 / 2.9 ≈ 125.86 days

Finally, the CCC is calculated as Inventory Days + Receivables Days - Payables Days, which is approximately 104.29 + 41.95 - 125.86 ≈ 20.38 days. When rounded, this gives us a Cash Conversion Cycle of about 20 days.

Therefore, the answer is:

1. 20 days