Question

Income Statement (in Millions of Dollars) Net sales $100.0 Cost of sales 60.0 Selling, general, and administrative expenses 20.0 Other expenses 15.0 Earnings after tax $ 5.0 a. Determine the length of the inventory conversion period. b. Determine the length of the receivables conversion period. •c. Determine the length of the operating cycle. d. Determine the length of the payables deferral period. •e. Determine the length of the cash conversion cycle. f. What is the meaning of the number you calculated in Part e?

Answer 1

Answer:

the balance sheet is missing:

Balance Sheet  (In millions of Dollars)

ASSETS

Cash                                     $6.0

Accounts Receivable              14.0

Average Inventory                   12.0

Fixed Assets, net                  40.0

TOTAL ASSETS                 $72.0

LIABILITIES AND EQUITY

Accounts Payable                $10.0

Salaries and Benefits Payable   2.0

Other current Liabilities            10.0

Long-term debt                         12.0

Equity                                     38.0

TOTAL LIABILITIES AND EQUITY                     $72.0

a. Determine the length of the inventory conversion period.

• inventory conversion period = average inventory / (COGS/365) = 73 days

b. Determine the length of the receivables conversion period.

• receivables conversion period = accounts receivables / (net sales/365) = 51.1 days

c. Determine the length of the operating cycle.

• length of operating cycle = 73 + 51.1 = 124.1 days

d. Determine the length of the payables deferral period.

• length of the payables deferral period = accounts payables / (COGS/365) = 60.83 days

e. Determine the length of the cash conversion cycle.

• cash conversion cycle = 73 + 51.1 - 60.83 = 63.27 days

f. What is the meaning of the number you calculated in Part e?

• How long does it take to turn inventories into cash, it is a measure of asset liquidity.