Suppose that LilyMac Photography has annual sales of $235,000, cost of goods sol
ID: 2740723 • Letter: S
Question
Suppose that LilyMac Photography has annual sales of $235,000, cost of goods sold of $170,000, average inventories of $5,000, average accounts receivable of $26,000, and an average accounts payable balance of $7,500.
Assuming that all of LilyMac’s sales are on credit, what will be the firm’s cash cycle? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)
Suppose that LilyMac Photography has annual sales of $235,000, cost of goods sold of $170,000, average inventories of $5,000, average accounts receivable of $26,000, and an average accounts payable balance of $7,500.
Explanation / Answer
Cash conversion = Days of inventory outstanding + Days of sales outstanding – Days of payables outstanding
Days of inventory outstanding = Average inventory / cost of goods sold per day
= $5,000/($170,000/365) = 10.7816
Days of sales outstanding = Average accounts receivable / revenue per day
= $26,000/($235,000/365) = 40.3829
Days of payable outstanding = Average accounts payable / cost of goods sold per day
= $7,500/($170.000/365) = 16.1029
Cash conversion = 10.7816+40.3829-16.1029 = 35.0618 days