Question

P14-1 (similar to) 13 Question Help 0 Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 84 days, and accounts receivable are collected in 31 days. Accounts payable are paid approximately 25 days after they arise. The firm has annual sales of about $36 million. Cost of goods sold are $19 million, and purchases are $13 million. a. Calculate the firm's operating cycle. b. Calculate the firm's cash conversion cycle. c. Calculate the amount of resources needed to support the firm's cash conversion cycle. d. Discuss how management might be able to reduce the cash conversion cycle. a. American Products' operating cycle, OC, is days. (Round to the nearest whole number.) Enter your answer in the answer box and then click Check Answer. 3 parts remaining Clear All Check Answer

Answer 1

a.
Operating cycle	Average inventory day + Collection period
Operating cycle	84+31
Operating cycle	115	days
b.
Cash conversion cycle	Operating cash flow - Payables period
Cash conversion cycle	115-25
Cash conversion cycle	90	days
c.
Calculation of amount of resources invested
Inventory	$4,372,603	(36000000*84/365)
Add: Accounts receivable	$3,057,534
Less: Accounts payable	$890,411
Resources invested	$6,539,726
d.
Management can reduce the operating cycle by investing lessor in its resouces
This can be done either by reducing the collection period or average inventory day
This would help to improve operating cycle