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.

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

Answer a.

Annual Sales = $625,400
Average Accounts Receivable = $34,700

Days Sales Outstanding = 365 * Average Accounts Receivable / Annual Sales
Days Sales Outstanding = 365 * $34,700 / $625,400
Days Sales Outstanding = 20.25 days

So, it takes 20.25 days to collect payment for the services.

Answer b.

If Payable Turnover is 10.50:

Payable Deferral Period = 365 / Payable Turnover
Payable Deferral Period = 365 / 10.50
Payable Deferral Period = 34.76 days

If Payable Turnover is 11.45:

Payable Deferral Period = 365 / Payable Turnover
Payable Deferral Period = 365 / 11.45
Payable Deferral Period = 31.88 days

Change in Payable Deferral Period = 34.76 - 31.88
Change in Payable Deferral Period = 2.88 days

So, payable deferral period decreases by 2.88 days.

Answer c.

Inventory Turnover = 22.20

Days Inventory Outstanding = 365 / Inventory Turnover
Days Inventory Outstanding = 365 / 22.20
Days Inventory Outstanding = 16.44 days

Cash Conversion Cycle = Days Sales Outstanding + Days Inventory Outstanding - Days Payable Outstanding
Cash Conversion Cycle = 20.25 + 16.44 - 31.88
Cash Conversion Cycle = 4.81 days