Question

Use the table for the​ question(s) below. Luther Industries had sales of​ $980 million and a cost of goods sold of​ $560 million in 2006.  A simplified balance sheet for the firm appears​ below: Luther Industries Balance Sheet As of December​ 31, 2006 ​ (millions of​ dollars) Assets Liabilities and Equity Cash 25 Accounts payable 60 Accounts receivable 85 Notes payable 425 Inventory 90 Accruals 45 Total current assets 200 Total current liabilities 530 Net​ plant, property, and equipment 6100 Long term debt 2725 Total assets 6300 Total liabilities 3255 Common equity 3045 Total liabilities and equity 6300 ​Luther's cash conversion cycle is closest to​ ________.

A. 66 days

B. 51 days

C. 129 days

D. 71 days

Answer 1

Inventory turnover = COGS/inventory

Inventory turnover = 560/90

Inventory turnover = 6.22

days of inventory on hand = number of days in a year/inventory turnover

days of inventory on hand = 365/6.22

days of inventory on hand = 58.68

Receivables turnover = Credit sales/receivables

Receivables turnover = 980/85

Receivables turnover = 11.53

days of sales outstanding = number of days in a year/receivables turnover

days of sales outstanding = 365/11.53

days of sales outstanding = 31.66

Accounts payables turnover = purchases/payables

Accounts payables turnover = 560/60

Accounts payables turnover = 9.33

days of payables outstanding = number of days in a year/accounts payable turnover

days of payables outstanding = 365/9.33

days of payables outstanding = 39.12

Operating cycle = days of sales outstanding + days of inventory on hand

Operating cycle = 31.66+58.68

Operating cycle = 90.34

Cash conversion cycle = Operating cycle - days of payables outstanding

Cash cycle = 90.34-39.12

Cash cycle = 51