Question

In: Finance

Quantitative Problem: Winston Inc. is trying to determine the effect of its inventory turnover ratio and...

Quantitative Problem: Winston Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash conversion cycle. Winston's 2015 sales (all on credit) were $181,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.43 times during the year. Its receivables balance at the end of the year was $13,171.01 and its payables balance at the end of the year was $7,404.13. Using this information calculate the firm's cash conversion cycle. Round your answer to the nearest whole. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations.

how many days?

Solutions

Expert Solution

days of inventory on hand = number of days in a year/inventory turnover
days of inventory on hand = 365/8.43
days of inventory on hand = 43.3
Receivables turnover = Credit sales/receivables
Receivables turnover = 181000/13171.01
Receivables turnover = 13.74
days of sales outstanding = number of days in a year/receivables turnover
days of sales outstanding = 365/13.74
days of sales outstanding = 26.56
COGS = 0.75*sales = 0.75*181000 = 135750
Accounts payables turnover = COGS/payables
Accounts payables turnover = 135750/7404.13
Accounts payables turnover = 18.33
days of payables outstanding = number of days in a year/accounts payable turnover
days of payables outstanding = 365/18.33
days of payables outstanding = 19.91
Operating cycle = days of sales outstanding + days of inventory on hand
Operating cycle = 26.56+43.3
Operating cycle = 69.86
Cash conversion cycle = Operating cycle - days of payables outstanding
Cash cycle = 69.86-19.91
Cash cycle = 49.95 = 50 days

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