Question

Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year

Answer 1

Answer:

new cash conversion cycle 144 days

Explanation:

The cahs conversion cycle is the ime from the inventory is purchased and paid until it is saold and collected.

Days inventory outstanding + Day account outstanding - credit line

$\frac{365}{Inventory TO} = Days on Inventory$

Where:

$\frac{COGS}{Average Inventory} = Inventory Turnover$

COGS:

$50,735,000 x 85% = $ 43,124,750

average inventory (15,012,000 + 13,066)/2

$\frac{43,124,750}{(15,012,000 + 13,066)/2} = 3.07$

Days invenotry Outstanding: 365 / 3.07 = 119

Then:

$\frac{Sales}{Average A/R} = A/R Turnover$

Sale $50,735,000

average A/R  (10,008,000 + 8,062,000)/2

$\frac{50,735,000}{ (10,008,000 + 8,062,000)/2} = 5.61$

Days sales outstanding: 365 / 5.61 = 64.99 = 65

Credit will go from 30 days to 40 days

119 + 65 -  40 = 144 days