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

Answer 1

Answer:

148.02 days

Explanation:

The computation of the cash conversion cycle is shown below:

As we know that

Cash conversion cycle is = Days inventory outstanding + days sale outstanding - days payable outstanding

where,

Number of days inventory outstanding is

= Average inventory ÷ cost of goods sold per day

= $75000 ÷ ($360,000 ÷ 365 days)

= 76.04 days

Number of days sales outstanding is

= Average account receivable ÷ Average sales per day

= $160,000 ÷ ($600,000 ÷ 365)

= 97.33 days

And, the number of days payable outstanding is

= Average accounts payable ÷ cost pf goods sold per day

= $25,000 ÷ ($360,000 ÷ 365)

= 25.35 days

So, the cash conversion cycle is

= 76.04 days + 97.33 days - 25.35 days

= 148.02 days