Question

Van Den Borsh Corp. has annual sales of $52,735,000, an average inventory level of $16,013,000, and average accounts receivable of $10,201,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 28th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 33rd day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,640,000 and accounts receivable by $1,640,000. What will be the net change in the cash conversion cycle, assuming a 365-day year? Do not round intermediate calculations. Round to the nearest whole day.

a. –32 days
b. –30 days
c. –13 days
d. –25 days
e. –11 days

Answer 1

Answer:the answer is e. -11 days.

Explanation:

The net change in the cash conversion cycle can be calculated by finding the changes in days sales outstanding (DSO), days inventory outstanding (DIO), and days payable outstanding (DPO).

Here are the steps to calculate the net change in the cash conversion cycle:

1. Calculate the initial DSO:

DSO = (Average accounts receivable / Annual sales) * 365

DSO = (10,201,000 / 52,735,000) * 365

DSO ≈ 70.616 days

2. Calculate the initial DIO:

DIO = (Average inventory level / Cost of goods sold) * 365

Cost of goods sold = 0.85 * 52,735,000

Cost of goods sold = 44,824,750

DIO = (16,013,000 / 44,824,750) * 365

DIO ≈ 128.905 days

3. Calculate the initial DPO:

DPO = Payment period to suppliers = 28 days

4. Calculate the revised DSO:

Revised DSO = (Remaining accounts receivable / Annual sales) * 365

Remaining accounts receivable = Average accounts receivable - Accounts receivable decrease

Remaining accounts receivable = 10,201,000 - 1,640,000

Remaining accounts receivable = 8,561,000

Revised DSO = (8,561,000 / 52,735,000) * 365

Revised DSO ≈ 59.207 days

5. Calculate the revised DIO:

Revised DIO = (Remaining inventory level / Cost of goods sold) * 365

Remaining inventory level = Average inventory level - Inventory decrease

Remaining inventory level = 16,013,000 - 1,640,000

Remaining inventory level = 14,373,000

Revised DIO = (14,373,000 / 44,824,750) * 365

Revised DIO ≈ 116.244 days

6. Calculate the revised DPO:

Revised DPO = Payment period to suppliers = 33 days

7. Calculate the net change in the cash conversion cycle:

Net Change in CCC = (Initial DSO - Revised DSO) + (Initial DIO - Revised DIO) + (Revised DPO - Initial DPO)

Net Change in CCC = (70.616 - 59.207) + (128.905 - 116.244) + (33 - 28)

Net Change in CCC ≈ -11.471 days

Rounding to the nearest whole day, the net change in the cash conversion cycle is approximately -11 days.

Therefore, the answer is e. -11 days.