Problem 16-11 Cash Conversion Cycle Negus Enterprises has an inventory conversio
ID: 2383423 • Letter: P
Question
Problem 16-11
Cash Conversion Cycle
Negus Enterprises has an inventory conversion period of 79 days, an average collection period of 49 days, and a payables deferral period of 20 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.
What is the length of the firm's cash conversion cycle?
days
If Negus's annual sales are $3,361,150 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar.
$
How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.
Problem 16-11
Cash Conversion Cycle
Negus Enterprises has an inventory conversion period of 79 days, an average collection period of 49 days, and a payables deferral period of 20 days. Assume that cost of goods sold is 80% of sales. Assume 365 days in year for your calculations.
What is the length of the firm's cash conversion cycle?
days
If Negus's annual sales are $3,361,150 and all sales are on credit, what is the firm's investment in accounts receivable? Round your answer to the nearest dollar.
$
How many times per year does Negus Enterprises turn over its inventory? Round your answer to two decimal places.
Explanation / Answer
Cash Conversion Cycle = DSO + DIO – DPO
Where,
DSO is days sales outstanding = Average Accounts Receivable × 365 ÷ Credit Sales
DIO is days inventory outstanding = Average Inventories × 365 ÷ Cost of Goods Sold
DPO is days payables outstanding = Average Accounts Payable × 365 ÷ Cost of Goods Sold
DIO = 79 days
DPO = 20 days
DSO = 49 days
Cash conversion cycle = 49 days + 79 days - 20 days
= 108 days.
Account receivable = Credit sales per day X Average length of collection period
Average daily sales = 3,361,150/365 = 9,209
= 9,209 * 49
= $ 451,223