Question

Plainville Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $600,000 Annual cost of goods sold = $360,000 Inventory = $75,000 Accounts receivable = $160,000 Accounts payable = $25,000
a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days

Answer 1

Answer:

Inventory cycle  = Inventory               x 365  days

                             Cost of goods sold      

Inventory cycle  = $75,000     x 365 days

                              $360,000  

                           = 76.04 days

Receivable days =  Accounts receivable x  365 days

                                       Sales        

                            = $160,000   x 365 days

                               $600,000  

                            =  97.33 days

Payable days      = Accounts payable  x 365 days

                              Cost of sales      

                            = $25,000    x 365 days

                               $360,000  

                            = 25.35 days

Cash conversion cycle

= Inventory cycle + Receivable days - Payable days

= 76.04 days + 97.33 days - 25.35 days

=  148.0 days

Explanation:

Cash conversion cycle is calculated as raw inventory cycle plus receivable days minus payable days. Inventory cycle is the ratio of inventory to cost of goods sold multiplied by number of days in a year. Receivable days refer to the ratio of accounts receivable to sales multiplied by number of days in a year. Payable day is the ratio of accounts payable to cost of goods sold multiplied by number of days in a year.