Question

Current Year			Prior Year
Accounts payable, end of year	$	9,023		$	12,968
Accounts receivable, net, end of year		29,905			18,752
Inventory, end of year		11,324			10,815
Net sales		163,000			110,000
Cost of goods sold		79,000			116,000

(1) Use the information above to compute the number of days in the cash conversion cycle for each year.
(2) Did the company manage cash more effectively in the current year?

Answer 1

Calculate the cash conversion cycle as follows for current year (CY) as follows: Cash conversion cycle(CY) = Days inventory outstanding +Days sales outstanding -Days payable outstanding = 52.32+66.97 -41.69 = 77.6 days Therefore, the cash conversion cycle in the current year is 77.6 days. Working Notes: Receivables365 Days sales outstanding (CY)=- Net sales 29,905 365 Days in inventory(CY) 163,000 = 66.97 days Inventory_ Cost of goods sold (11,324 365 x Days in a year (79.000 * 365 = 52.32 days * Accounts payable Days payable outstanding(CY)=- Cost of goods sold 9,023 *365 79.000* 365 =41.69 days

Calculate the cash conversion cycle for prior year as follows: Cash conversion cycle(PY) = Days inventory outstanding +Days sales outstanding -Days payable outstanding = 34.03 +62.22-40.80 = 55.45 days Therefore, the cash conversion cycle is 55.45 days Working notes: Days in inventory (PY)= Inventory -Days in a year Cost of goods sold) (10,815 365 116,000 = 34.03 days Days sales outstanding (PY-Receivables 265 Net sales 18,752 X365 110,000 = 62.22 days Accounts payable Cost of goods sold 12.968 25 -X365 116,000 = 40.80 days b. The cash conversion cycle of current year is more than the previous year. Hence, the firm did not manage its cash efficiently.