Question

Accounts payable, end of year $ 5,643 $ 9,588 Accounts receivable, net, end of year 21,325 16,438 Inventory, end of year 7,944 7,175 Net sales 202,000 167,000 Cost of goods sold 112,000 125,000 (1) Use the information above to compute the number of days in the cash conversion cycle for each year. (2) Did the company manage cash more effectively in the current yea

Answer 1

Answer:

(1) We have:

Current year cash conversion cycle = 46.03 days

Previous year cash conversion cycle = 28.88 days

(2) The company did NOT manage cash more effectively in the current year.

Explanation:

Cash conversion cycle (CCC) can be described as a metric that is employed to show the length of time, in days, that a company takes to convert inventory and resources into cash flows. The CCC can be calculated using the following formula:

Cash conversion cycle = Days inventory outstanding + Days Sales Outstanding - Days payable outstanding ............ (1)

Where:

Days inventory outstanding = (Ending inventory / Cost of goods sold) * 365

Days Sales Outstanding = (Ending accounts receivable / Net sales) * 365

Days payable outstanding = (Ending accounts payable / Cost of goods sold) * 365

(1) Use the information above to compute the number of days in the cash conversion cycle for each year

Using equation (1) above, we have:

For the Current year, we have:

Days inventory outstanding = (7,944 / 112,000) * 365 = 25.89 days

Days Sales Outstanding = (21,325 / 202,000) * 365 = 38.53 days

Days payable outstanding = (5,643 / 112,000) * 365 = 18.39 days

Therefore, we have:

Current year cash conversion cycle = 25.89 + 38.53 - 18.39 = 46.03 days

For the Previous year, we have:

Days inventory outstanding = (7,175 / 125,000) * 365 = 20.95 days

Days Sales Outstanding = (16,438 / 167,000) * 365 = 35.93 days

Days payable outstanding = (9,588 / 125,000) * 365 = 28.00 days

Therefore, we have:

Previous year cash conversion cycle = 20.95 + 35.93 - 28.00 = 28.88 days

(2) Did the company manage cash more effectively in the current year

Since the Current year cash conversion cycle of 46.03 days is greater than the Previous year cash conversion cycle of 28.88 days, this indicates that the company did NOT manage cash more effectively in the current year.