Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle? Average inventory = $75,000 Annual sales = $775,000 Annual cost of goods sold = $465,000 Average accounts receivable = $160,000 Average accounts payable = $25,000 128.4 days 121.5 days 87.1 days 114.6 days 88.2 days

The correct answer is 114.6 Days.

Explanation:

According to the scenario, the computation of the given data are as follows:

Cash conversion cycle = Outstanding Inventory days + Sales outstanding days - Payable outstanding days

Where, Outstanding inventory days = Average Inventory ÷ Cost of goods sold per day

= $75,000 ÷ ( $465,000 ÷ 365) = 58.87 Days

, Sales outstanding days = Average accounts receivable ÷ Sales per day

= $160,000 ÷ ( $775,000 ÷ 365) = 75.35 Days

And Payable outstanding days = Average accounts payable ÷ cost of goods sold per day

= $25,000 ÷ ( $465,000 ÷ 365) = 19.62 days

By putting the value in the formula, we get

Cash conversion cycle = 58.87 Days + 75.35 Days - 19.62 days

= 114.6 Days

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