Question

In: Accounting

You are reviewing the company’s working capital investment for the past three years.(17 marks) 2014 2015...

You are reviewing the company’s working capital investment for the past three years.

2014

2015

2016

2017

sales

1285000

1544000

1850000

2405000

Cost of sales

579000

803000

1019500

1445000

inventory

68000

83650

97750

118800

debtors

158750

198500

253010

349900

creditors

58700

91100

125690

198068

Calculate and comment on the cash conversion cycle for 2015,2016,2017

Solutions

Expert Solution

Calculation of Cash Conversion Cycle
2014 2015 2016 2017
Sales (i) 1285000 1544000 1850000 2405000
Cost of Sales (ii) 579000 803000 1019500 1445000
Inventory (iii) 68000 83650 97750 118800
Debtors (iv) 158750 198500 253010 349900
Creditors (v) 58700 91100 125690 198068
Average Inventory (Note 1) (vi) 75825 90700 108275
Days Inventory Outstanding {(vi)*360/(ii) [A] 33.99 32.03 26.98
Average Debtors (Note 2) (vii) 178625 225755 301455
Days Sales Outstanding {(vii)*360/(i)} [B] 41.65 43.93 45.12
Average Creditors (Note 3) (viii) 74900 108395 161879
Days Payables Outstanding {(viii)*360/(ii)} [C] 33.58 37.68 40.33
Cash Conversion Cycle [A+B-C] 42.06 37.68 31.77

Comments:

Cash Conversion Cycle (CCC) assesses how efficiently the company is managing its own working capital.

The CCC for the company has been decreasing from 2015 to 2017 consistently. This means that the Operating Efficiency of the company has been increasing over the years, the working capital available with the company has been used with an increased efficiency over these 3 years. This is a good sign for the company and indicates the good operating health of the company.

Working Notes:

Note 1: Average Inventory

2015 = (68000+83650)/2 = 75825

2016 = (83650+97750)/2 = 90700

2017 = (97750+118800)/2 = 108275

Note 2: Average Debtors

2015 = (158750+198500)/2 = 178625

2016 = (198500+253010)/2 = 225755

2017 = (253010+329900)/2 = 301455

Note 3: Average Creditors

2015 = (58700+91100)/2 = 74900

2016 = (91100+125690)/2 = 108395

2017 = (125690+198068)/2 = 161879

Note 4: For easier calculations, the total number of days in a year has been taken as 360, and the results have been rounded off to the closest decimal places.

ekkarill92 answered 1 year ago
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