Question

What is the cash conversion cycle for a firm with $3 million average inventories, $2 million average accounts payable, a receivables period of 45 days, and an annual cost of goods sold of $20 million?

Answer 1

The cash conversion cycle (CCC) for the firm is calculated by determining the Inventory Period, Receivables Period, and Payables Period. Using the data provided, the CCC is found to be approximately 63 days, which represents the number of days from when the firm invests in inventory to when it receives the cash from sales.

Step-by-step explanation:

The question asks for calculation of the cash conversion cycle (CCC), which is a metric used to measure how long it takes for a company to convert its investments in inventory into cash from sales, by considering inventory turnover, receivables, and payables. The formula for CCC is given by:

CCC = Inventory Period + Receivables Period - Payables PeriodWhere,Inventory Period is calculated as (Average Inventory / Cost of Goods Sold) × 365 days.Receivables Period (also known as Days Sales Outstanding) is already given as 45 days.Payables Period is calculated as (Average Accounts Payable / Cost of Goods Sold) × 365 days.Given data:Average Inventories = $3 millionAverage Accounts Payable = $2 millionAnnual Cost of Goods Sold = $20 millionReceivables Period = 45 daysNow let's calculate each period:Inventory Period = ($3 million / $20 million) × 365 = 54.75 daysReceivables Period = 45 days (given)Payables Period = ($2 million / $20 million) × 365 = 36.5 daysFinally, the cash conversion cycle is:CCC = 54.75 days + 45 days - 36.5 days = 63.25 daysTherefore, the cash conversion cycle for the firm is approximately 63 days.