The following data is taken from a firm’s income statement: Sales 6,000 Cost of goods sold...

The following data is taken from a firm’s income statement: Sales 6,000 Cost of goods sold 4,500 Interest 600 Tax 150

And from its balance sheet: Cash 800 Inventory 650 Accounts receivable 180 Accounts payable 460

(a) Calculate the firm’s cash conversion cycle. Use 365 days per year.
(b) Is reducing the cash conversion cycle a good objective or not? Explain.
(c) Can a cash conversion cycle be negative? Explain, and if so, give an example of a type of firm that would have a negative cycle.

Solutions

Expert Solution

(a). Cash conversion cycle = 26.36 days

Explanation;

Cash conversion cycle =

Days inventory outstanding + Days sales outstanding – Days payable outstanding

Days inventory outstanding = $650 * 365 / $4500

= 52.72 days

Days sales outstanding = $180 * 365 / $6000

= 10.95 days

Days payable outstanding = $460 * 365 / $4500

= 37.31 days

Hence, Cash conversion cycle = 52.72 days + 10.95 days – 37.31 days

= 26.36 days

(b).

Reducing the cash conversion cycle a good objective because reduced cash conversion cycle will help a company in realisation of cash much quickely in compare to a company which have longer cash conversion cycle.

That is why it is true that reducing the cash conversion cycle a good objective.

(c).

It is true that a cash conversion cycle can be negative. Negative cash conversion cycle means a company is generating revenue from the customers before this company has to pay its suppliers. Such type of situation result into negative cash conversion cycle.

For example;

Amazon company have negative cash conversion cycle. Apart from this Dell company also showed negative cash conversion cycle in some years.

jeff jeffy answered 5 months ago

Next > < Previous

Related Solutions

Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement The following data...

Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement The following data from the just completed year are taken from the accounting records of Mason Company: Sales .......................................... $524,000 Direct labor cost.................................. $70,000 Raw material purchases............................ $118,000 Selling expenses ................................. $140,000 Administrative expenses ........................... $63,000 Manufacturing overhead applied to work in process ...... $90,000 Actual manufacturing overhead costs ................. $80,000 Inventories Beginning of End of Year Year Raw materials.............. $7,000 $15,000 Work in process............ $10,000 $5,000...

The 2018 income statement of Adrian Express reports sales of $15,015,000, cost of goods sold of...

The 2018 income statement of Adrian Express reports sales of $15,015,000, cost of goods sold of $8,863,500, and net income of $1,570,000. Balance sheet information is provided in the following table. ADRIAN EXPRESS Balance Sheets December 31, 2018 and 2017 2018 2017 Assets Current assets: Cash $ 570,000 $ 730,000 Accounts receivable 1,340,000 970,000 Inventory 1,740,000 1,370,000 Long-term assets 4,770,000 4,210,000 Total assets $ 8,420,000 $ 7,280,000 Liabilities and Stockholders' Equity Current liabilities $ 1,990,000 $ 1,630,000...

Prepare the companies statement of cash flows: Income statement: Sales $180,000 Cost of Goods Sold ($110,000)...

Prepare the companies statement of cash flows: Income statement: Sales $180,000 Cost of Goods Sold ($110,000) Depreciation Expense ($30,000) Operating Expense ($18,000) Loss on sale of land ($1,000) Gain on the sale of equipment $5,000 Net income $26,000 Balance Sheet- 2017/2016 Cash- $35,000 (2017)/ $53,000 (2016) AR- $25,000 / $32,000 Inventory- $40,000 / $32,000 Prepaid Expense- $5,000 / $4,000 Investments- $15,000 / $10,000 Land- $15,000 / $18,000 Build & Equip, net- $145,000 / $122,000 Total Assets- $280,000 / $271,000 Acct....

Bayside, Inc. 2017 Income Statement ($ in thousands) Net sales $ 6,170 Cost of goods sold...

Bayside, Inc. 2017 Income Statement ($ in thousands) Net sales $ 6,170 Cost of goods sold 4,590 Depreciation 395 Earnings before interest and taxes $ 1,185 Interest paid 44 Taxable income $ 1,141 Taxes 399 Net income $ 742 Bayside, Inc. 2016 and 2017 Balance Sheets ($ in thousands) 2016 2017 2016 2017 Cash $ 145 $ 250 Accounts payable $ 1,710 $ 1,770 Accounts rec. 1,130 970 Long-term debt 880 680 Inventory 1,805 2,130 Common stock 3,380 3,350...

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,700 Cost of goods sold...

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,700 Cost of goods sold 7,340 Depreciation 405 Earnings before interest and taxes $ 955 Interest paid 82 Taxable income $ 873 Taxes 306 Net income $ 567 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 2016 2017 Cash $ 150 $ 185 Accounts payable $ 1,180 $ 1,260 Accounts rec. 920 730 Long-term debt 1,000 1,265 Inventory 1,520 1,550 Common stock 3,210 2,900...

Q4. The 2021 income statement of Adrian Express reports sales of $20,710,000, cost of goods sold...

Q4. The 2021 income statement of Adrian Express reports sales of $20,710,000, cost of goods sold of $12,600,000, and net income of $1,980,000. Balance sheet information is provided in the following table. ADRIAN EXPRESS Balance Sheets December 31, 2021 and 2020 2021 2020 Assets Current assets: Cash $ 840,000 $ 930,000 Accounts receivable 1,775,000 1,205,000 Inventory 2,245,000 1,675,000 Long-term assets 5,040,000 4,410,000 Total assets $ 9,900,000 $ 8,220,000 Liabilities and Stockholders' Equity Current liabilities $ 2,074,000 $ 1,844,000 Long-term liabilities...

Joyner Company’s income statement for Year 2 follows: Sales $ 714,000 Cost of goods sold ...

Joyner Company’s income statement for Year 2 follows: Sales $ 714,000 Cost of goods sold 207,000 Gross margin 507,000 Selling and administrative expenses 217,000 Net operating income 290,000 Nonoperating items: Gain on sale of equipment 7,000 Income before taxes 297,000 Income taxes 89,100 Net income $ 207,900 Its balance sheet amounts at the end of Years 1 and 2 are as follows: Year 2 Year 1 Assets ...

everal items are omitted from the income statement and cost of goods manufactured statement data for...

everal items are omitted from the income statement and cost of goods manufactured statement data for two different companies for the month of December. On Company Off Company Materials inventory, December 1 $85,120 $108,950 Materials inventory, December 31 (a) 123,110 Materials purchased 216,200 (a) Cost of direct materials used in production 228,120 (b) Direct labor 320,900 245,140 Factory overhead 99,590 122,020 Total manufacturing costs incurred in December (b) 704,910 Total manufacturing costs 812,040 967,480 Work in process inventory, December 1...

Several items are omitted from the income statement and cost of goods manufactured statement data for...

Several items are omitted from the income statement and cost of goods manufactured statement data for two different companies for the month of May: 1 Rainier Company Yakima Company 2 Materials inventory, May 1 $280,000.00 $177,000.00 3 Materials inventory, May 31 (a) 175,000.00 4 Materials purchased 712,600.00 340,000.00 5 Cost of direct materials used in production 752,800.00 (a) 6 Direct labor 1,059,800.00 (b) 7 Factory overhead 326,600.00 179,400.00 8 Total manufacturing costs incurred in May (b) 1,038,000.00 9 Total manufacturing...

Several items are omitted from the income statement and cost of goods manufactured statement data for...

Several items are omitted from the income statement and cost of goods manufactured statement data for two different companies for the month of December: On Company Off Company Materials inventory, December 1 $88,800 $119,880 Materials inventory, December 31 (a) 135,460 Materials purchased 225,550 (a) Cost of direct materials used in production 237,980 (b) Direct labor 334,780 269,730 Factory overhead 103,900 134,270 Total manufacturing costs incurred in December (b) 775,620 Total manufacturing costs 847,160 1,064,530 Work in process inventory, December 1...

Subjects