Question

Canadian Bacon Inc. financial statements are presented in the table below.

Based on the information in the table, and using a 365-day year, calculate cash conversion cycle

Round the answers to two decimal places

Balance Sheet December 31, 2011

Cash and marketable securities	$143,000	Accounts payable	$278,000
Accounts receivable	$354,000	Notes payable	$87,000
Inventories	$672,000	Accrued expenses	$65,000
Prepaid expenses	$12,500	Total current liabilities	$430,000
Total current assets	$1,181,500	Long-term debt	$284,000
Gross fixed assets	$1,675,000	Par value and paid-in-capital	$228,000
Less: accumulated depreciation	$500,000	Retained Earnings	$1,414,500
Net fixed assets	$1,175,000	Common Equity	1,642,500
Total assets	$2,356,500	Total liabilities and owner’s equity	$2,356,500

Income Statement Year of 2011

Net sales (all credit)	$3,136,600.00
Less: Cost of goods sold	$2,195,620.00
Selling and administrative expenses	$345,000.00
Depreciation expense	$146,000.00
EBIT	$449,980.00
Interest expense	$45,300.00
Earnings before taxes	$404,680.00
Income taxes	$161,872.00
Net income	$242,808.00

Answer 1

Cash Conversion Cycle (CCC) = Days of Sales Outstanding (DSO) + Days of Inventory outstanding (DIO) - Days of Payable Outstanding (DPO)

Days of Sales Outstanding (DSO) = Average Accounts Receivable divided by revenue per day

= [(Beginning Accounts Receivable+Ending Accounts Receivable)/2]/(Revenue/365)

As per the given question,

Accounts Receivable = $354,000, Revenue for the year = $31,36,600

Therefore , DSO = $ 354,000 / ($31,36,600/365) = $ 354,000 / $ 8593.43 = 41 days

Days of Inventory Outstanding (DIO) = Average inventory divided by cost of goods sold per day

= [(Beginning Inventory +Ending Inventory)/2/(Cost of goods sold/365)]

As per the given question,

Inventory = $ 672,000, Cost of Goods Sold = $ 21,95,620

Therefore, DIO = $ 672,000 / ( $ 21,95,620/365) = $ 672,000 / $ 6,015 = 112 days

Days of Payable Outstanding (DPO) = Average accounts payable divided by cost of goods sold per day.

= [(Beginning Accounts Payable +Ending Accounts Payabl)/2/(Cost of goods sold/365)]

As per the given question,

Accounts Payable = $ 278,000, Cost of Goods Sold = $ 21,95,620

Therefore, DPO = $ 278,000 / ( $ 2195,620 /365) = $ 278,000 / $ 6,015 = 46 days

Therefore Cash Conversion Cycle (CCC) = DSO + DIO - DPO = 41+112-46 = 107 days

[ Note : It is assumed that Notes Payable is not related to purchase of goods and hence does not form part of Accounts Payable.]