Sims Electric Corp. has been striving for the last 5 years to improve its manage
ID: 2736971 • Letter: S
Question
Sims Electric Corp. has been striving for the last 5 years to improve its management of working capital. Historical data for the firm's sales, accounts receivable, inventories, and accounts payable follow: a. Calculate Sims' days of sales outstanding, days of payables outstanding and days of sales in inventory for each of the 5 years. Assume a 365-day year. b. Calculate Sims' cash conversion cycle for each of the 5 years. Evaluate Sims' overall management of its working capital. Assume a 365-day year. a. Calculate Sims' days of sales outstanding, days of payables outstanding and days of sales in inventory for each of the 5 years. Assume a 365-day year.Explanation / Answer
Evaluation:The Sales are more and more convertible into cash that is the receivables proportion of sales has decreased over the years so that the DSO has decreased over the years.Days for which the inventory was held also has reduced signaling effective inventory management that is inventory is more fastly converted into sales.The days payable has increased indicating that the firm is taking more and more time to pay back for the goods purchased.
Overall the Cash conversion cycle has reduced that is the time taken to convert the inventory purchased till its sold has reduced but the days payables has increased ,indicating overall better and improving working capital management.
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Sales-Net 2838 3410 5298 7727 12361 Receivables 427 540 731 906 1492 Accounts Payable 285 432 457 1034 1625 Inventories 247 310 438 250 248 COGS(70%Sales) 1986.60 2387.00 3708.60 5408.90 8652.70 Purchases=COGS+chg in Inventory 2233.60 2450.00 3836.60 5220.90 8650.70 Receivables T/o=Sales/Receivable 6.65 6.31 7.25 8.53 8.28 Days Sales O/s=365/Receivables T/o(DSO) 54.92 57.80 50.36 42.80 44.06 Inventory T/o=COGS/Inventories 8.04 7.70 8.47 21.64 34.89 Days Sales in Inventory=365/Inventory T/o(DOH) 45.38 47.40 43.11 16.87 10.46 Payable T/o=Purchases/Accounts Payable 7.84 5.67 8.40 5.05 5.32 Days of Payables O/s=365/Payable T/o 46.57 64.36 43.48 72.29 68.56 Cash Conversion Cycle=DSO+DOH-DaysPayables 53.73 40.84 49.99 -12.62 -14.05