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Q2. Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables Its cost of goods sold is 70% of sales. What is Ashwell's cash conversion cycle (CCC)? Q3. Miller Technologies buys $800,000 of materials (net of discounts) on terms of 3/5, net 60, and it currently pays after 5 days and takes discounts. Miller plans to expand, and this will require additional financing. If Miller decides to forego discounts and thus to obtain additional credit from its suppliers, what would the nominal and effective cost of that credit be? 04. Murtaugh Manufacturing sells on terms of 2/5, net 40. Total annual sales are $950,000. 40% of the customers pay on the 5th day and take discounts, and the remainder pay, on average, 50 days after their purchases. All sales and receivables are recorded net of discounts, regardless of whether or not discounts are actually taken. a. What is the firm's average accounts receivable balance? b. What should the nominal cost of trade credit be to those customers who do not take discounts, based on a 365 day year, assuming that they pay on time, even though they do not? c. What is the actual nominal cost of trade credit to those customers who do not take discounts, based on a 365 day year, recognizing that they do not pay on time? d. What is the effective cost of trade credit to those customers who do not take discounts, based on a 365 day! year, recognizing that they do not pay on time?

Answer 1

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Solution#2)

Days Receivables Outstanding(DRO) :

=365 * (Receivables / Sales)

= 365 * ($150,000 / $1,600,000)

= 34.22 days

Days Inventory Outstanding (DIO) :

= 365 * Inventory / Cost of goods sold

= 365 * ($200,000 / $1,120,000)

= 65.18 days

Days Payables Outstanding :

= 365 * (Payable / Cost of goods sold)

= 365 * ($100,000 / $1,120,000)

= 32.59 days

Casg Conversion Cycle = DRO + DIO – DPO

= 34.22 + 65.18 – 32.59 = 66.81 days