Question

In: Accounting

What do the turnover ratios and cash cycle indicate about this company? Company Industry Receivables Turnover...

What do the turnover ratios and cash cycle indicate about this company?

Company

Industry

  1. Receivables Turnover (Days)

15

13

  1. Inventory Turnover (Days)

18

21

  1. Cost of Goods Sold (COGS)
    or Cost of Revenue in $

51445

46488

  1. Accounts Payable (AP) in $

1281

2402

  1. Payables Turnover  (Pay TO)                  = COGS / AP

40.16

19.35

  1. Days Payables (DP)  = 365 / Pay TO

9.08

18.86

  1. Cash Cycle = 1 + 2 - 6

23.91

15.14

Solutions

Expert Solution

Receivable turnover

Receivable turnover ratio measures the company's effectiveness with regards to collection of receivable. High receivable turnover ratio (times) means Company collects their receivable quickly.

In case of receivable turnover (days) lower the ratio is good because it indicates recover from customers quickly.

In this case receivable turnover ratio is 15 days that means customers take on an average 15 days to pay their receivable.

Inventory turnover

Inventory turnover ratio (days) measures the company's efficiency with regards to Inventory management. It indicates how many days on an average Company needs to turn its inventory into sales.

In this case Inventory turnover ratio (days) is 18 days that means company need on an average 18 days to turn its inventory into sales.

Payable turnover

Payable turnover ratio measures the company's short term liquidity to pay off its suppliers.

Payable turnover ratio shows how many times a company pays off its payable during a specified period.

Higher payable ratio indicates that company pays it's bill in a shorter amount of time than those with a lower ratio.

In this case Company's payable turnover ratio is 40.16 that means Company pay off its creditors 40.16 times during the period.

Days payable

Days payable measures the number of days on an average Company takes to pay its creditors.

In this case company takes approximately 10 days to pay its creditors.

Cash Cycle

Cash cycle refers to the time is taken by the company to turn Purchase of merchandise inventory or raw materials used to make the product into cash receipt from customers.

Shorter cash cycle is better than longer. Shorter cash cycle refers Company has more working capital, less cash is tied up in account receivables and inventories.

In this case Company's cash cycle is approximately 24 days that means company takes on an average 24 days to convert it's merchandise inventory/ raw materials used make the product into cash receipt from customers.

Thank you:)


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