Sway's Market is considering a project that will require the purchase of $1.4 million in new equipment. The equipment will be de
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Answer:
A. Accounts receivable period days = 8.0 days
B. Accounts payable period days = 23.4 days
C. Inventory period days = 48.0 days
D. Cash conversion cycle = 32.6 days
Explanation:
A. We know,
Accounts receivable period days =
Accounts receivable turnover =
Given,
Sales = $5,000
Accounts receivable = $110
As, there is no beginning balance of accounts receivable, the normal balance of accounts receivable will be treated as average accounts receivable.
Therefore, Accounts receivable turnover =
Accounts receivable turnover = 45.5 times
Again, Accounts receivable period days =
Accounts receivable period days = 8.0 days
B. We know,
Accounts payable period days =
Again, to determine accounts payable period days, we have to find accounts payable turnover.
Accounts payable turnover =
As there is no purchase, cost of goods sold will be used to determine the payable turnover. Moreover, there is no beginning balance of accounts payable, we will use ending accounts payable as average payable.
Given,
Purchase (Cost of goods sold) = $4,200
Accounts payable = $270
Accounts payable turnover =
Accounts payable turnover = 15.6 times
Therefore, Accounts payable period days =
Accounts payable period days = 23.4 days
C. We know,
Inventory period days =
To determine inventory period days, we have to find inventory turnover.
Inventory turnover =
As there is no beginning balance of inventory, we will use ending inventory as average inventory.
Inventory turnover =
Inventory turnover = 7.6 times
Therefore, Inventory period days =
Inventory period days = 48.0 days
D. We know,
Cash conversion cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
Here, Days Payable Outstanding = Accounts payable period days = 23.4 days
Days Inventory Outstanding = Inventory period days = 48.0 days
Days Sales Outstanding = Accounts receivable period days = 8.0 days
Putting the value in the formula, we can get,
Cash conversion cycle = 8.0 + 48.0 - 23.4 days
Cash conversion cycle = 32.6 days