Question

Annual sales $9,700,000 Cost of goods sold $7,275,000 Inventory $3,200,000 Accounts receivable $1,800,000 Accounts payable $2,400,000 Blue Ostrich's CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value Inventory conversion period Average collection period Payables deferral period Cash conversion cycle Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? O Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold. O Current assets should be divided by sales, but current liabilities should be divided by the COGS. Is there generally a positive or negative relationship between net working capital and the cash conversion cycle? (In other words, if a firm has a high level of net working capital, is it likely to have a high or low cash conversion cycle?) There is a positive relationship between net working capital and the cash conversion cycle. There is a negative relationship between net working capital and the cash conversion cycle.

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Blue Ostrich
Inventory turnover:
Cost of goods sold	7,275,000.00
Inventory	3,200,000.00
Inventory turnover	2.27
Inventory conversion period	160.55
Accounts Receivable turnover:
Annual sales	9,700,000.00
Accounts Receivable	1,800,000.00
Accounts Receivable turnover	5.39
Average Collection period	67.73
Payables deferral turnover:
Cost of goods sold	7,275,000.00
Accounts Payable	2,400,000.00
Payables deferral turnover:	3.03
Payables deferral period	120.41
Cash Conversion Cycle
Inventory conversion period	160.55
Add: Average Collection period	67.73
Less: Payables deferral period	120.41
Cash Conversion Cycle	107.87
Multiple choice questions:
Option A
Option A
Option A
Option A
Option A
Option A