Question

In: Finance

What is the cash conversion cycle of this company? Please show your working. Annual Sales: €35,000...

What is the cash conversion cycle of this company? Please show your working.

Annual Sales: €35,000
Average Accounts Receivables: €750
COGS: €20,000
Average Inventories: €3,000
Average Trade Payables: €1,500

Solutions

Expert Solution

Solution: Cash Conversion Cycle calculation measures how long cash is tied up in inventory and other resources input into cash. we divide it into 3 parts

1st Part: Inventory : it represent how long will company take to sell this inventory

2nd part: it represent  the current sales and the amount of time it takes to collect the cash from these sales.

3rd part: it represent when company will pay to his vendors for purchased goods.

Cash Conversion Cycle= Days Inventory Outstanding+Days of Sales Outstanding + Days Payable Outstanding

Days Inventory Outstanding= Average inventory/Cost of goods sold*365

= 3000/20000*365=54.75 days Round of 55 days

Days of Sales Outstanding= AccountReceivable/ Net credit Sale*365

= 750/35000*365=7.82 days = 8 days

Days Payable Outstanding= Accounts Payable/  Cost of goods sold*365

= 1500/20000*365= 27.37= 27 days

According to Formula= 55+8-27=36 days

High Cash conversion cycle means companyis inefficient to measure the cash.

Low cash conversion cycle means company is efficient in managing cash

Conclusion: Answer is 36 days


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