Question

Your boss asks you to compute the company's cash conversion cycle. looking at the financial statements, you see that the average inventory for the year was $126,300, accounts receivable were $97,900, and accounts payable were at $115,100. you also see that the company had credit sales of $324,000 and that cost of goods sold was $282,000. what is your firm's cash conversion cycle? round to the nearest day.

Answer 1

Cash conversion cycle is an efficiency ratio which measures the number of days for which a company’s cash is tied up in inventories and accounts receivable. It is aimed at assessing how effectively a company is managing its working capital. Formula Cash Conversion Cycle = DSO + DIO – DPO Where, DSO is days sales outstanding = Average Accounts Receivable × 365 ÷ Credit Sales DIO is days inventory outstanding = Average Inventories × 365 ÷ Cost of Goods Sold DPO is days payables outstanding = Average Accounts Payable × 365 ÷ Cost of Goods Sold DSO=(97,900*365)/324,000=110.2 DIO=(126,300*365)/282,000=163.5 DPO=(115,100*365)/282,000=149 Cash Conversion Cycle = DSO + DIO – DPO Cash Conversion Cycle = 110.2+163.5-149=125(Approx)