Question

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 $168,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.03 times during the year. Its receivables balance at the end of the year was $13,172.98 and its payables balance at the end of the year was $7,400.17. 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.
days

Answer 1

Inventory turnover = COGS/inventory

Inventory turnover = 365000/120000

Inventory turnover = 3.04

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

days of inventory on hand = 365/8.03

days of inventory on hand = 45.45

Receivables turnover = Credit sales/receivables

Receivables turnover = 168000/13172.98

Receivables turnover = 12.75

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

days of sales outstanding = 365/12.75

days of sales outstanding = 28.63

Accounts payables turnover = purchases/payables

Accounts payables turnover = 126000/7400.17

Accounts payables turnover = 17.03

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

days of payables outstanding = 365/17.03

days of payables outstanding = 21.43

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

Operating cycle = 28.63+45.45

Operating cycle = 74.08

Cash conversion cycle = Operating cycle - days of payables outstanding

Cash cycle = 74.08-21.43

Cash cycle = 52.65 = 53 days