Question

Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate.
As one part of your analysis, you want to determine the firm's cash conversion cycle.

Using the following information and a 365-day year, what is the firm's present cash conversion cycle?

Average inventory

$75,000

Annual sales

$600,000

Annual cost of goods sold

$360,000

Average accounts receivable

$160,000

Average accounts payable

$25,000

Answer 1

Answer:

Inventory cycle = Inventory                 x       365 days

                            Cost of goods sold

                          = $75,000   x 365 days

                             $360,000

                          = 76 days

Receivable days = Receivables x 365 days

                               Sales  

                             = $160,000 x 365 days

                                $600,000  

                             = 97 days

Payable days = Payables                 x 365 days

                         Cost of goods sold

                        = $25,000          x 365 days

                           $360,000

                        = 25 days

Cash conversion cycle = Inventory cycle + Receivable days - Payable days

Cash conversion cycle = 76 + 97 - 25 = 148 days

                                                                                                                                                                                                                                      Explanation:

Cash conversion cycle is the aggregate of inventory cycle and receivable days minus payable days. Inventory cycle is the ratio of inventory to cost of sales multiplied by 365 days. Receivable days measure the ratio of receivables to sales multiplied by 365 days. Payable days measure the ratio of payables to cost of sales multiplied by 365 days. Cash conversion cycle is the time lag between when inventory is purchased and when payment is made.