Question

The following table information represents the financial statements for the Genatron Manufacturing Corporation for the years 2013 and 2014: Selected Balance Sheet Information: Category 2013 2014 Cash $50,000 $40,000 Accounts receivable 200,000 260,000 Inventory 450,000 500,000 Total current assets $700,000 $800,000 Bank loan, 10% $90,000 $90,000 Accounts Payable 130,000 170,000 Accruals 50,000 70,000 Total current liabilities $270,000 $330,000 Long-term debt, 12% 300,000 400,000 Selected Income Statement Information: Category 2013 2014 Net sales $1,300,000 $1,500,000 Cost of goods sold 780,000 900,000 Gross Profit $520,000 $600,000 Net income $93,000 $114,000 Calculate Genatron’s operating cycle and cash conversion cycle for 2013 and 2014. Why did they change between these years?

Answer 1

Operating cycle = Inventory Conversion Period + Days Sales Outstanding.

Inventory Conversion period = ( 365 / Cost of Goods Sold ) * Inventory

Days Sales Outstanding = ( 365 / Net Sales) * Accounts Receivable.

	2013	2014
Inventory Conversion Period	211 days	203 days
Days Sales Outstanding	56 days	63 days
Operating Cycle	267 days	266 days

Cash conversion cycle = Operating cycle - Payables Deferral Period.

Payables Deferral Period = ( 365 / Cost of Goods Sold) * ( Accounts Payable + Accruals)

	2013	2014
Operating Cycle	267 days	266 days
Payables Deferral Period	84 days	97 days
Cash Conversion Cycle	183 days	169 days

Though Genatron's operating cycle remained the same for both 2013 and 2014, its cash conversion cycle improved from 183 days to 169 days, because of better payables management. It managed to defer payables for a longer period of time in 2014 as compared to 2013, resulting in faster cash conversion.