Question

Arcane Industries has provided the following financial information:

	2018	2019
Sales	$1,350,000	$1,600,000
Cost of Goods Sold	750,000	875,000
Receivables Ending Balance	175,000	300,000
Inventory Ending Balance	300,000	250,000
Payables Ending Balance	125,000	175,000

Calculate the following:

Inventory Turnover:    

Days Inventory on Hand:    

Receivables Turnover:    

Days Sales Outstanding:    

Payables Turnover:    

Days Payables Outstanding:    

Cash Conversion Cycle (# of days):    

Answer 1

1. Inventory turnover ratio = Cost of the goods sold / Average inventory

where, Average inventory = Beginning inventory + Ending inventory / 2

For 2019:

Ending inventory = $250000, Beginning inventory = Ending inventory of previous year = $300000

Average inventory = ($250000 + $300000) / 2 = $550000 / 2 = $275000

Cost of the goods sold = $875000

Putting these values in the inventory turnover ratio formula, we get,

Inventory turnover ratio = $875000 / $275000 = 3.18

2.  Days inventory on hand = 365 / Inventory turnover ratio

Inventory turnover ratio = 3.18 times ( as computed in point (1) above)

Putting these values in the Days' inventory on hand ratio formula, we get,

Days' inventory on hand = 365 / 3.18 = 114.78 days

3. Receivable turnover ratio = Sales / Average accounts receivables

where, Average accounts receivables = Beginning accounts receivables + Ending receivables / 2

For 2019:

Ending accounts receivables = $300000, Beginning accounts receivables = $175000

Average accounts receivables = ($300000 + $175000) / 2 = $475000 / 2 = $237500

Sales = $1600000

Putting these values in the accounts receivable turnover ratio formula, we get,

Receivables turnover ratio = $1600000 / $237500 = 6.74

(4) Days' sales outstanding = 365 / Accounts receivable turnover ratio

Accounts receivable turnover ratio = 6.74 times ( as computed in point (3) above)

Putting these values in the Days' sales outstanding ratio formula, we get,

Days' sales outstanding = 365 / 6.74 = 54.15 days

5. Payables turnover ratio = Cost of goods sold / Average accounts payables

where, Average accounts payables = Beginning accounts payables + Ending accounts payables / 2

For 2019:

Beginning accounts payables = $125000, Ending accounts payables = $175000

Average accounts receivables = ($125000 + $175000) / 2 = $300000 / 2 = $150000

Cost of goods sold = $875000

Putting these values in the accounts payables turnover ratio formula, we get,

Payables turnover ratio = $875000 / $150000 = 5.83

(6) Days' payables outstanding = 365 / Accounts payables turnover ratio

Accounts payables turnover ratio = 5.83 times ( as computed in point (5) above)

Putting these values in the Days' payables outstanding ratio formula, we get,

Days' payables outstanding = 365 / 5.83 = 62.61 days

(7) Cash conversion cycle = Days inventory in hand + Days' sales outstanding - Days' payables outstanding

Putting the values iin the above equation, we get,

Cash conversion cycle = 114.78 + 5.83 - 62.61 = 58 days