Question

The Greek Connection had sales of $29.7 million and a cost of goods sold of $11.9

million in 2015. A simplified balance sheet for the firm appears? below:

THE GREEK CONNECTION

Balance Sheet as of December? 31, 2015? (thousands of? dollars)

Assets			Liabilities and Equity
Cash	?$1,762		Accounts payable	?$1,252
Accounts receivable	$3,501		Notes payable	$1,000
Inventory	$1,145		Accruals	$1,220
Total current assets	?$6,408		Total current liabilities	?$3,472
Net? plant, property, and equipment	?$8,500		?Long-term debt	?$3,000
Total assets	$14,908		Total liabilities	?$6,472
			Common equity	?$8,436
			Total liabilities and equity	?$14,908

a. Calculate The Greek? Connection's net working capital in 2015.

b. Calculate the cash conversion cycle of The Greek Connection in 2015.

c. The industry average accounts receivable days is 30 days. What would the cash conversion cycle for The Greek Connection have been in 2015 had it matched the industry average for accounts receivable? days?

Answer 1

a) Net working capital (in thousands) = Current assets - Current liabilities

Current assets = $6408 , Current liabilities = $3472

Net working capital ('000) = $6408 - $3472 = $2936

b) Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payable outstanding

where, Days inventory outstanding = (Inventory / cost of the goods sold) * 365 days

where cost of the goods sold (in thousands) = $11900

= ($1145 / 11900) * 365 = 35 days

Days sales outstanding = Accounts receivable / sales * 365

where, Sales (in thousands) = $29700

= ($3501 / $29700) * 365 = 43 days

Days payable outstanding = Payables / Purchases * 365

Purchases (in thousands) = Cost of the goods sold + Closing stock

= 11900 + 1145 = $13045

Days payable outstanding = ($1252 / $13045) *365 = 35 days

Cash conversion cycle = 35 + 43 - 35 = 43 days

c) Cash conversion cycle based on industry average, when accounts receivable days is 30 days is:

= 35 + 30 - 35 = 30 days