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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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Answer:
Days Inventory Outstanding = Inventory / Average Daily Sales
Days Inventory Outstanding = $5,000,000 / $120,000
Days Inventory Outstanding = 41.67 days

Days Sales Outstanding = Accounts Receivable/ Average Daily Sales
Days Sales Outstanding = $2,000,000 / $120,000
Days Sales Outstanding = 16.67 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Cash Conversion Cycle = 41.67 + 16.67 – 31
Cash Conversion Cycle = 27.34 days


jeff jeffy answered 2 years ago
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