A firm has days' sales in an inventory of 105 days, an average collection period of...

A firm has days' sales in an inventory of 105 days, an average collection period of 35 days, and takes 42 days, on average, to pay its accounts payable. Taken together, what do these three figures imply about the firm's operations and its cash flows?

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Expert Solution

Days sales of an inventory will be reflecting that average time in days that a company will take for conversion of its inventory and work in progress into sales.

Average collection period of 35 days will be reflecting that the company will be taking 35 days on average in order to collect money from the debtors.

Average payment period will be reflecting the time taken by the company in order to pay off it's creditors.

when we will taking all three ratios in consideration, we will find that the company is too slow in converting its inventory into sales,whereas when it comes to managing of the liquidity in relation with creditor and debtor, it can be seen that company is collecting its money quickly and companies paying its money later so the company will be having more flexibility and liquidity in its hands and the more cash in its hands as it can be seen that average collection period is lower than the average payment period.

jeff jeffy answered 1 year ago

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