Question

Pizza di Joey operates several food trucks that provide hot food and beverages in the Washington DC area. The company has annual sales of $625,400. Cost of goods sold average 32 percent of sales and the profit margin is 4.5 percent. The average accounts receivable balance is $34,700. Assume 365 days per year. [Please show your work on an Excel sheet]

a. On average, how long does it take the company to collect payment for its services?

b. What is the change in the Payables deferral period if the payables turnover has gone from an average of 10.50 times to 11.45 times per year?

c. What is the length of the company's cash conversion cycle after the change in the Payables deferral period if the inventory turnover is 22.20 times?

Answer 1

(a)-The number of days taken by the company to collect payment for its services

Average Collection period = Average accounts receivables / Sales per day

= $34,700 / [$625,400 / 365 Days]

= $34,700 / $1,713.42 per day

= 20.25 Days

(b)-Change in the Payables deferral period if the payables turnover has gone from an average of 10.50 times to 11.45 times per year

Payables deferral period if the payables turnover ratio is 10.50 Times = Number of days in a year / payables turnover ratio

= 365 Days / 10.50 Times

= 34.76 Days

Payables deferral period if the payables turnover ratio is 11.45 Times = Number of days in a year / payables turnover ratio

= 365 Days / 11.45 Times

= 31.88 Days

Therefore, the Change in the Payables deferral period = 34.76 Days – 31.88 Days

= 2.88 Days

(c)-The length of the company's cash conversion cycle after the change in the Payables deferral period if the inventory turnover is 22.20 times

Days sales in Inventory = Number of days in year / Inventory turnover ratio

= 365 Days / 22.20 Times

= 16.44 Days

Therefore, the Cash Conversion Cycle = Average Collection Period + Days sales in Inventory - Accounts Payables Deferral Period

= 20.55 Days + 16.44 Days – 31.88 Days

= 4.81 Days