Question

The Greek Connection had sales of $32 million in 2009, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:
THE GREEK CONNECTION
Balance Sheet
As of December 31, 2009
(000)
Assets Liabilities and Equity
Cash $2,000 Accounts payable $1,500
Accounts receivable 3,950 Notes payable 1,000
Inventory 1,300 Accruals 1,220
Total current assets $7,250 Total current liabilities $3,720
Net plant, property Long-term debt $3,000
and equipment $8,500 Total liabilities $6,720
Total Assets $15,750 Common equity 9,030
Total liabilities and equity $15,750
a. Calculate The Greek Connection’s net working capital in 2009.
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
c. The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?
Sales (000) $32,000 Days in a year 365
Cost of Goods Sold (000) $20,000
a. Calculate The Greek Connection’s net working capital in 2009.
Net working capital (000)
b. Calculate the cash conversion cycle of The Greek Connection in 2009.
Accounts receivable days
Inventory days
Accounts payable days
Cash conversion cycle (days)
c. The industry average days sales outstanding ratio is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2009 had it matched the industry average days sales outstanding?
Industry accounts receivable days 30
Cash conversion cycle (days)

Answer 1

Answer:

The Greek Connection

a. Net working capital in 2009 is:

= $3,530

b. Cash conversion cycle in 2009:

= 42 days

c. Cash conversion cycle if matched with industry average days sales outstanding:

= 27 days

Explanation:

Sales in 2009 = $32 million

Cost of goods sold in 2009 = $20 million

THE GREEK CONNECTION

Balance Sheet

As of December 31, 2009  (000)

Assets  

Cash                              $2,000  

Accounts receivable       3,950  

Inventory                          1,300  

Total current assets                           $7,250

Net plant, property , and equipment $8,500  

Total Assets                                      $15,750

Liabilities and Equity

Accounts payable                              $1,500

Notes payable                                      1,000

Accruals                                               1,220

Total current liabilities                      $3,720  

Long-term debt                                $3,000

Total liabilities                                  $6,720

Common equity                                 9,030

Total liabilities and equity             $15,750

a. Net working capital in 2009:

Total current assets                         $7,250

Total current liabilities                    ($3,720)

Net working capital                         $3,530

b. Cash conversion cycle in 2009:

Accounts receivable days = Accounts receivable/Sales * 365

= $3,950/$32,000 * 365 = 45 days

Inventory days = $1,300/$20,000 * 365 = 24 days

Accounts payable days = $1,500/$20,000 * 365 = 27 days

Cash conversion cycle (days) = 42 days

c. Cash conversion cycle with industry average days sales outstanding:

Accounts receivable days = 30 days

Inventory days =                   24 days

Accounts payable days =    (27) days

Cash conversion cycle =     27 days