Question

DOLLAR BILL'S, a retail store in New York City, buys its inventory on credit. Upon purchase, it is given 30 days in which to pay its suppliers. It sells all of its merchandise on credit. It extends 60 days of credit to its customers. Its inventory turnover rate is 60 days.

Situation 1
Using the Cash Conversion Model, measure DOLLAR BILL'S financing cycle in both days and money ($US) using the following assumptions:

• Sales of $730,000
• Gross Margin of 30%
• Financing Rate 61/2%

Situation 2
Recent management decisions have had the following impact:

• DOLLAR BILL has renegotiated its credit line so that it has 35 days to pay its suppliers
• It now extends 45 days of credit to its customers,
• It has an inventory turnover rate of 45 days.

All other factors remain the same. Has DOLLAR BILL’S financing cycle improved or declined? Quantify the change in days and in dollars. Please show your work.

Answer 1

Situation 1: Using the Cash Conversion Model

	Receivable from customers	60Days
Add:	Inventory turnover	60days
Less:	Days payable		30days
	Cash conversion cycle	90days
	Sales(in $)		7,30,000.00
	Gross margin(%)		30%
	Gross profit(in $)		2,19,000.00
	COGS (in $)	5,11,000.00
	Cost of financing @ 6.5% for 30 days(in $)	2,768
	Net cash (in $)		2,16,232

Situation 2

Receivable from customers	45days
Inventory turnover	45days
Days payable	35days
Cash conversion cycle	55days
Sales (in $)		7,30,000.00
Gross margin	30%
Gross profit (in $)	2,19,000.00
COGS (in $)	5,11,000.00
cost of financing @ 6.5% for 30 days (in $)	3,229
Net cash (in $)	2,15,771

---------------

Hope this will help, please comment if you need any further explanation, Please Encourage us by Up Voting the Answer which is Very Helpful to us. Thank You!
----------------