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Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average...

Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average daily sales are $120,000. The company’s payables deferral period (accounts payable divided by daily purchases) is 31 days. What is their cash conversion cycle?

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Expert Solution

Average collection period  
Average collection period = Accounts Receivables / Average daily sales
Average collection period = $2,000,000 / $120,000
Average collection period = 16.67 Days  
Inventory conversion period  
Inventory conversion period = Inventory / Average daily sales
Inventory conversion period = $5,000,000 / $120,000
Inventory conversion period = 41.67 Days  
Cash Conversion Cycle (CCC)
Cash Conversion Cycle = Average collection period + Inventory conversion period - payables deferral period
Cash Conversion Cycle = 16.67 Days + 41.67 Days - 31.00 Days  
Cash Conversion Cycle = 27.34 Days  
Therefore, the Cash Conversion Cycle will be 27.34 Days or 28 Days  

jeff jeffy answered 2 years ago
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