Question

(Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for the Crimson Mfg. Company​ follows:

   2014   2015   2016   2017   2018
Sales   4,346   5,220   7,947   11,699   18,461
Receivables   602   811   1,086   1,368   2,268
Acounts payable   443   683   682   1,554   2,409
Inventories   341   456   655   378   354

a. Calculate​ Crimson's days of sales​ outstanding, days of payables​ outstanding, and days of sales in inventory for each of the 5 years. ​(Assume a​ 365-day year. Hint​: Assume that the​ firm's cost of goods sold equals​ 70% of​ sales.) What has Crimson accomplished in its atempts to better manage its investments in account receivable and​ inventory? ​(Round to two decimal​ places.)

b. Calculate​ Crimson's cash conversion cycle for each of the 5 years. Evaluate the​ firm's overall management of its working capital. Assume a​ 365-day year.

Days of sales outstanding​ (DSO)

2014........2015........2016........2017.......2018
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Answer 1

Answer:-

To find Crimson's days of sales outstanding and days of sales in inventory we have to calculate Inventory turnover ratio and Receivable turnover ratio.

Inventory Turnover Ratio = Cost of goods sold / Inventory

Cost of goods sold =70% of sales

Receivables turnover ratio= Net credit sales/ Average receivables

Sales (Net) are taken as Net credit sales as credit sale is not given.

	2014	2015	2016	2017	2018
Cost of goods sold (70% of sales)	3042.2	3,654	5562.9	8189.3	12922.7
Inventory Turnover Ratio	=3042.2/341 =8.92	=3654/456 =8.01	=5562.9/655 =8.49	=8189.3/378 =21.66	=12922.7/354 =36.50
Days of sales in inventory = Days in a year/Inventory turnover ratio	=365/8.92 =40.92	=365/8.01 = 45.57	=365/8.49 = 42.99	=365/21.66 = 16.85	=365/36.50 = 10
Receivable turnover ratio	=4346/602 =7.22	=5220/811 =6.44	=7947/1086 =7.32	=11699/1368 = 8.55	=18461/2268 =8.14
Days of sales outstanding = Days in a year/Receivables turnover ratio	=365/7.22 =50.55	=365/6.44 =56.68	=365/7.32 =49.86	=365/8.55 =42.69	=365/8.14 =44.84

Crimson done good job in reducing the no. of days in holding inventory and receivable turnover ratio. It will managing both inventory and receivables in proper manner.

Here, Information of net purchases or credit purchases is not giving , due to which we cannot calculate Days of payables outstanding (DPO) which turn affect the calculation of Cash Conversion Cycle (CCC).

Cash Conversion Cycle (CCC) = Days of Inventory + Days of sales outstanding - Days of payables outstanding