Question

I need help with the solution for P15-1, page 683 of Principles of Managerial Finance, 15th edition. thank you!

here is the question

CHAPTER 15 Working Capital and Current Assets Management 683 PROBLEMS All problems are available in MyLab Finance. The Mylab icon indicates problems in Excel format available in MyLab Finance. LGO P15-1 Cash conversion cycle American Products is concerned about managing cash effi- ciently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Goods sold total $20 million, and purchases are $15 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.

Answer 1

Answer a.

Operating Cycle = Average Inventory Period + Average Collection Period
Operating Cycle = 80 + 40
Operating Cycle = 120 days

Answer b.

Cash Conversion Cycle = Operating Cycle - Average Payable Period
Cash Conversion Cycle = 120 - 30
Cash Conversion Cycle = 90 days

Answer c.

Average Inventory Period = 365 * Inventory / Cost of Goods Sold
80 = 365 * Inventory / $20,000,000
Inventory = $4,383,561.64

Average Collection Period = 365 * Accounts Receivable / Sales
40 = 365 * Accounts Receivable / $30,000,000
Accounts Receivable = $3,287,671.23

Average Payable Period = 365 * Accounts Payable / Cost of Goods Sold
30 = 365 * Accounts Payable / $20,000,000
Accounts Payable = $1,643,835.62

Cash Needed = Accounts Receivable + Inventory - Accounts Payable
Cash Needed = $3,287,671.23 + $4,383,561.64 - $1,643,835.62
Cash Needed = $6,027,397.25

Answer d.

Management can reduce the cash conversion cycle by reducing cash resources invested or by reducing average collection period or by increasing average payable period.