Question

P14-1 (similar to) Question Help fome Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 77 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 32 days after they arise. The firm has annual sales of about $40 million Cost of goods sold are $18 million, and purchases are $14 million ents 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. an a. American Products operating cycle, OC is 117 days (Round to the nearest whole number.) b. American Products' cash conversion cycle, CCC, is 85 days. (Round to the nearest whole number) meText . The amount of resources that must be invested to support American Products' CCC is (Round to the nearest dollar) edia Libra lal Calcula Enter your answer in the answer box and then click Check Answer. er Resource 1 part Clear All remaining Check Awer nie Study unication Tools

Answer 1

a]	Operating cycle = 77+40 =	117 Days
b]	Cash conversion cycle = 77+40-32 =	85 Days
c]	Amount of resources to be invested = 18000000*77/365+40000000*40/365-14000000*32/365 =	$         69,53,425
d]	The CCC can be reduced by reducing:
	*the age of the inventories. This can be achieved by
	increasing sales, decreasing the production cycle,
	reducing the stock, etc,.
	*the average collection period of the receivables by
	better credit and collection policies.
	The CCC can be reduced also by increasing the payables
	period. But, care should be taken to see that it does
	not affect credibility with the suppliers.