The Chickman Corporation has an inventory conversion period of 60 days, a receiv
ID: 2701580 • Letter: T
Question
The Chickman Corporation has an inventory conversion period of 60 days, a receivables collection period of 30 days, and a payables deferral period of 30 days. Its annual credit sales are $6,000,000, and its annual cost of goods sold (COGS) is 60% of sales.
a. What is the length of the firm's cash conversion cycle?
b. What is the firm's investment in accounts receivable?
c. What is the company's inventory turnover ratio?
d. Identify three ways in which the company could reduce its cash conversion cycle?
e. What are the possible risks of reducing the cash conversion cycle per your recommendations in part d?
Explanation / Answer
a) Cash conversion cycle = Inventory days + Debtor days - Creditor days
= 60+30-30 = 60 days
b) receivables days = 365 * accounts receivables / credit sales
30 = 365*ac receivables / 6000000
ac recievables = $493150.68
c) Inventory turnover ratio = 365/Inventory days = 365/60 = 6.08
d) Company can reduce its cash conversion cycle by following ways
e) The risk involved with the suggestion that i gave are