[CPApracticer]

Hi, I am stuck on a question that gives an answer, but no explanation. Can anyone help me with this. Thank you!

Financial information about a company is as follows:
Receivables: 4000000
Inventory: 2600000
Payables: 3700000
Sales: 50000000
Cost of Goods Sold: 45000000

Assuming a 365-day year, what is the number of days in the company’s cash conversion cycle?

A. 18.2 days
B. 20.3 days CORRECT
C. 21.2 days
D. 23.5 days

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[Anonymous]

NOC [NET OPERATING CYCLE] = CCC [CASH CONVERSION CYCLE = (ICP + RCP – PDP)

CCC = 365 ÷(SALES/R) + 365÷(COGS/INVY) – 365÷(COGS/P)
CCC = [365 ÷(50M/4M)] + [365÷(45M/2.6M)] – [365÷( 45M/3.7M)]
CCC = [365÷12.5M] + [365÷ 17.31] – [365 ÷ 12.16]
CCC = 29.5 + 21.09 – 30.02
CCC = 20.27

[Anonymous]

Additional formulas to remember related to CCC:

Inventory Turnover
ITO=COGS/INVY
Inventory Conversion Period
ICP = 365/ITO

Receivable Turnover
RTO or ARTO = SALES/RECEIVABLE

Receivable Collection Period
RCP = 365/RTO

Payable Turnover
PTO = COGS/PAYABLE

Payable Deferral Period
PDP = 365/PTO

[Pete E. Rino]

Cash conversion cycle = (a) Inventory Conversion Period + (b) Receivables Collection period – (c) Payables deferral period.

To get (a) first you calculate Inventory turnover ratio, which is COGS/Average Inventory = 45000000/2600000 = ~17.3
Inventory conversion period = 365 / inventory turnover ratio = 365/17.3 = ~21.09

To get (b) first you calculate Accounts receivable turnover ratio which is Net Credit Sales/Average A/R = 50000000/4000000 = ~12.5
Receivables collection period = 365 / A/R receivable turnover ratio = 365/12.5 = ~29.2

To get (c) first you calculate Accounts payable turnover ratio which is COGS/Average A/P = 45000000/3700000 = ~12.16
Payables deferral period = 365/ A/P turnover ratio = 365/12.16 = ~30.11

21.09+29.2–30.11 = ~20.3

[Author]

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