Question

Bania Inc. has annual sales of $17 million, inventory levels of $2.5 million, receivables of $3.5 million, and payables of $1.25 million.  The firms cost of goods sold is 80% of sales.

What is Bania’s CCC?

Please show all work step by step.

Answer 1

Formula of Cash conversion cycle is as below:

Days inventory outstanding (DIO) + Days sales outstanding (DSO) - Days payable outstanding (DPO)

We need to calculate DIO, DSO and DPO for CCC.

DIO = (Average inventory/cost of goods sold)*365

For calculation of average inventory [(beginning inventory + ending inventory)/2] we need beginning and ending inventory which are not given. So, we'll use given inventory as avg. inventory.

DIO = [$2.5/($17*80%)]*365 = ($2.5/$13.6)*365 = 0.1838235294117647‬*365 = 67 Days

DSO = (Avg. accounts receivable/total credit sales)*365

No information is given about credit sales in the question. So, we assume entire sales of $17 million was on credit.

DSO = ($3.5/$17)*365 = 0.2058823529411765‬*365 = 75 Days

DPO = (Avg. accounts payable/cost of goods sold)*365

DPO = [$1.25/($17*80%)]*365 = ($1.25/$13.6)*365 = 0.0919117647058824‬‬*365 = 34 Days

CCC = 67 days + 75 days - 34 days = 108 Days