Question

Compute Cash Conversion Cycle for Competing Firms Halliburton and Schlumberger compete in the oil field services sector. Refer to the following 2018 financial data for the two companies to answer the requirements. $ millions HAL SLB Total revenue $23,275 $31,831 Cost of sales and services 20,379 27,624 Average accounts receivable 5,135 7,983 Average inventory 2,712 4,028 Average accounts payable 2,786 10,130 a. Compute the following measures for both companies. Note: Round your final answers to one decimal place (for example, enter 6.8 for 6.77555). HAL SLB 1. Days sales outstanding (DSO) Answer Answer 2. Days inventory outstanding (DIO) Answer Answer 3. Days payables outstanding (DPO) Answer Answer 4. Cash conversion cycle (CCC) Answer Answer b. Which company better manages its accounts receivable? Answer c. Which company uses inventory more efficiently? Answer d. Which company better manages its accounts payable? Answer

Answer 1

Answer a.

HAL:

Days sales outstanding = 365 * Average accounts receivable / Total revenue
Days sales outstanding = 365 * $5,135 / $23,275
Days sales outstanding = 80.5 days

Days inventory outstanding = 365 * Average inventory / Cost of sales and services
Days inventory outstanding = 365 * $2,712 / $20,379
Days inventory outstanding = 48.6 days

Days payable outstanding = 365 * Average accounts payable / Cost of sales and services
Days payable outstanding = 365 * $2,786 / $20,379
Days payable outstanding = 49.9 days

Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding
Cash conversion cycle = 80.5 days + 48.6 days - 49.9 days
Cash conversion cycle = 79.2 days

SLB:

Days sales outstanding = 365 * Average accounts receivable / Total revenue
Days sales outstanding = 365 * $7,983 / $31,831
Days sales outstanding = 91.5 days

Days inventory outstanding = 365 * Average inventory / Cost of sales and services
Days inventory outstanding = 365 * $4,028 / $27,624
Days inventory outstanding = 53.2 days

Days payable outstanding = 365 * Average accounts payable / Cost of sales and services
Days payable outstanding = 365 * $10,130 / $27,624
Days payable outstanding = 133.8 days

Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding
Cash conversion cycle = 91.5 days + 53.2 days - 133.8 days
Cash conversion cycle = 10.9 days

Answer b.

HAL is managing its accounts receivable better as it has lower days sales outstanding.

Answer c.

HAL is using its inventory efficiently as it has lower days inventory outstanding.

Answer d.

HAL is managing its accounts payable better as it has lower days payable outstanding.