Question

Cash conversion cycle American Products is concemed about managing cash efficiently. On the average, inventories have an age of 78 days, and accounts receivable are collected in 45 days. Accounts payable are paid approximately 34 days after they arise. The firm has annual sales of about $30 million. Cost of goods sold are $19 milion, and purchases are $17 million. ome 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 ents an a. American Products' operating cycle, OC, isdays. (Round to the nearest whole number.) eText edia Libra

Please I NEED all of them

Answer 1

Answer -

As per given information,

Average age of inventory (AAI) = 78 days

Average collection period (ACP) = 45 days

Average payment period (APP) = 34 days

Sales = $30 million

Cost of goods sold = $19 million

Purchases = $17 million

a. Answer -

Operating cycle (OC) = Average age of inventory (AAI) + Average collection period (ACP)

Operating cycle (OC) = 78 + 45

Operating cycle (OC) = 123 days

b. Answer -

Cash conversion cycle (CCC) = Operating cycle (OC) - Average payment period (APP)

Cash conversion cycle (CCC) = 123 - 34

Cash conversion cycle (CCC) = 89 days

c. Answer -

Resources needed to support the firms cash conversion cycle

1. Inventory = Cost of goods sold * (AAI / Days in a year)

Inventory = 19000000 * (78 /365)

Inventory = $4060273.97

2. Accounts receivable = Sales * (ACP / Days in a year)

Accounts receivable = 30000000 * (45 /365)

Accounts receivable = $3698630.13

3. Accounts payable = Purchases * (APP / Days in a year)

Accounts payable = 17000000 * (34 /365)

Accounts payable = $1583561.64

Resources needed to support the firms cash conversion cycle = Inventory + Accounts receivable - Accounts payable

Resources needed to support the firms cash conversion cycle = $4060273.97 + $3698630.13 - $1583561.64

Resources needed to support the firms cash conversion cycle = $6175342.46

d. Answer -

Management is able to reduce the cash conversion cycle by following activities:

Reduce the average age of inventory (AAI)

Reduce the average collection period (ACP)

Increase the average payment period (APP)

In short, Management is able to reduce the cash conversion cycle by reducing the amount of resources being invested into it.