Company A's for 2014 had $56,940M in Sales, $44,754M Cost of Goods Sold. The Account Receivable were $9,842M. Finally, the Inventory and Accounts Payable were $1,382M and $15,223M respectively.

a. Use it to compute the company cash conversion cycle

 

b. What happens if the Accounts Payable increases by 10%?

 

c. What should be the value for Accounts Payable in order to have a Cash Conversion Cycle of 0 days?

 

d. Imagine that sales increases by 18%. Applying the Percentage of Sales Method, what would be the new Cash Conversion Cycle?

 

a. Cash Conversion Cycle= Days Inventory Outstanding + Days Sales' Outstanding -Days Payable Outstanding

= (Inventory /CGS * 365) + (Accounts Receivable / Sales * 365) - (Accounts Payable /CGS * 365)

= (1382000 * 365) +(9842000 * 365) - (15223000 * 365)

44754000 56940000 44754000

= 11 +63 -124

=-54 days

When cash conversion cycle is negative, meaning the company has greater liquidity.

b. Cash Conversion Cycle= Days Inventory Outstanding + Days Sales' Outstanding -Days Payable Outstanding

= (Inventory /CGS * 365) + (Accounts Receivable / Sales * 365) - (Accounts Payable /CGS * 365)

= (1382000 * 365) +(9842000 * 365) - (15223000 x 1.1 * 365)

44,754,000 56,940,000 44,754,000

= 11 +63 -136

=-62 days

This means that the company has less time to sell its inventory and receive cash from its customers compared to time in which it has to pay its suppliers of the inventory (or raw materials).

c. To have a cash conversion cycle, DPO should be equal to DIO + DSO. In this case,

CCC = 11 + 63 -x

0 =74 -x

x=74

So, the DPO should be 74 days.

d.

Cash Conversion Cycle =(Invty /Sales * 365) + ( AR/Sales * 365 ) - (AP /Sales * 365)

CGS/Sales CGS/Sales

Substitute figures and you get:

=( 2% * 365 ) + (14% x 365) - ( 27% * 365)

79% 79%

= 9 + 53 -124

= -62 days

You may check through the usual method and you will yield the same answer. A nil or small difference is due to rounding off numbers.