Question

The following figures are extracted from the recent financial statements of a manufacturer called Technograph. The company produces custom-use monitors and has a large amount of working capital due to many purchases of electronic materials from suppliers, inventory of finished goods and work-in-process. However, due to recent hikes in loan rates the cost of financing has gone up and the management is not happy with the large amount of cash that is being tied up in the firm.

Management first wants to know how long cash is tied up in the operations, from the time it is spent on raw materials to the time it is recovered through sales.

All numbers are in thousands of dollars.

Starting inventory	12843
Ending inventory	1293
Starting Accounts Receivable	7193
Ending Accounts Receivable	6594
Starting Accounts Payable	4384
Ending Accounts Payable	5615
COGS	112101
Sales	130721

What is the Days of Inventory Outstanding? ____________________

What is the Days of Payables Outstanding? ____________________

What is the Days of Sales Outstanding? _______________________

Part 2)

What is the cash to cash cycle (cash conversion cycle) for the company? Answer in full days:

Answer 1

ANS 1) Days of Inventory outstanding is calculated by the following formula

Days of inventory outstanding= Average Inventory/Cost of goods sold(COGS)*No. of days in year

Average inventory=(starting inventory +closing inventory)/2

=(12843+ 1293)/2

=7068

Now, Days of inventory outstanding=7068/112101*365

=23.01 days

ANS 2) Days of Payables outstanding=Average accounts payable/COGS*365

Average accounts payable=(starting accounts payable+ending accounts payable)/2

=(4384+5615)/2

=4999.5

Now, Days of payables outstanding=4999.5/112101*365

=16.27 days

ANS 3) Days of sales outstanding=Average accounts receivables/COGS*365

Average accounts receivables=(starting accounts receivable+ending accounts receivable)/2

=(7193+6594)/2

=6893.5

Now, Days of sales outstanding= 6893.5/112101*365

=22.44 days

ANS 4) Cash to Cash Cycle= Days of inventory outstanding+Days of sales outstanding-Days of payables outstanding

=23.01+22.44-16.27

=29.18 days.