Question

Consider additional data for Archer-Daniels-Midland for fiscal years ending June 30, 2010 and 2011, in millions:

Fiscal Year End

(in millions)                June 30, 2011             June 30, 2010

Sales                          $80,676                       $61,682

Cost of goods sold      $76,376                      $57,839

Fiscal Year End

(in millions)                June 30, 2011             June 30, 2010

Accounts receivable   $9,816                        $6,122

Inventories                 $12,055                       $7,871

Accounts payable      $11,165                      $8,115

1. Calculate the DSO, DIO, and DPO for fiscal years ending June 30, 2010, and 2011.

2. How do the operating and cash conversion cycles compare for 2010 and 2011 with fiscal years ending in 2008 and 2009? What has changed and why?

Additional Information:

From the income statement, we need sales and cost of goods sold:

(in millions)                                 Fiscal Year End June 30, 2009

Sales                                          $69,207

Cost of goods sold                       $65,118

From the balance sheet we need the balances in receivables, inventories, and accounts payables:

                                                   Fiscal Year End

(in millions)                           June 30, 2009                        June 30, 2008

Accounts receivable                    $7,311                                     $11,483

Inventories                                 $7,782                                      $10,160

Accounts payable                       $5,786                                     $6,544

Answer 1

Answer 1
DSO i.e. Days Sales Outstanding = [Average Accounts Receivable/Credit sales] x 365 days
Average Accounts Receivable for June 30,2010 = [$6122 + $7311]/2 = $6716.50
Average Accounts Receivable for June 30,2011 = [$9816 + $6122 ]/2 = $7969
DSO for fiscal year ending June 30,2010 = [$6716.50 / $61682] x 365 days = 39.74 days
DSO for fiscal year ending June 30,2011 = [$7969 / $80676] x 365 days = 36.05 days
Answer 2
DIO i.e. Days Inventory Outstanding = [Average Inventory/Cost of goods sold] x 365 days
Average Inventory for June 30,2010 = [$7871 + $7782]/2 = $7826.50
Average Inventory for June 30,2011 = [$12055 + $7871]/2 = $9963
DIO for fiscal year ending June 30,2010 = [$7826.50 / $57839] x 365 days = 49.39 days
DIO for fiscal year ending June 30,2011 = [$9963 / $76376] x 365 days = 47.61 days
Answer 3
DPO i.e. Days payable outstanding = [Average accounts payable / Cost of goods sold] x 365 days
Average Accounts Payable for June 30,2010 = [$8115 + $5786]/2 = $6950.50
Average Accounts Payable for June 30,2011 = [$11165 + $8115]/2 = $9640
DPO for fiscal year ending June 30,2010 = [$6950.50 / $57839] x 365 days = 43.86 days
DPO for fiscal year ending June 30,2011 = [$9640 / $76376] x 365 days = 46.07 days
Answer 4
Operating cycle = Days sales outstanding + Days Inventory outstanding
	2010	2011
DSO	39.74	36.05
Add : DIO	49.39	47.61
Operating Cycle (in days)	89.13	83.66
Cash conversion cycle = Days sales outstanding + Days Inventory outstanding - Days Payable Outstanding
	2010	2011
DSO	39.74	36.05
Add : DIO	49.39	47.61
Less : DPO	43.86	46.07
Cash Conversion Cycle (in days)	45.27	37.59