Cash management is a very important function of managers. Companies need to mana

Question

Cash management is a very important function of managers. Companies need to manage their operations in a way that they can sustain growth and yet not run out of cash Consider the case of the Extensive Enterprise Corporation Extensive Enterprise Corporation has forecasted sales of $29,000,000 for next year and expects its cost of goods sold (COGs) to remain at 80% of sales. Currently, the firm holds $2,900,000 in inventories, $2,300,000 in accounts receivable, and $2,600,000 in accounts payable Approximately how long does it take Extensive Enterprise to convert its raw materials to its finished products and then to sell those goods? (Note: In all calculations, assume that there are 365 days in a year.) O 47.91 days O 34.22 days O 45.63 days O 50.19 days on average, it takes from the time a sale is made until the time cash is collected from customers Extensive Enterprise relies on customer credit when it buys raw materials from its suppliers. On average, it takes after the firm purchases materials before it sends cash to its suppliers What is the length of Extensive Enterprise's cash conversion cycle (CCC)? O 33.67 days O 35.35 days O 28.62 days O 30.30 days

Explanation / Answer

Solution: 1st Answer is 3rd option 45.63 days Working Notes: Time taken to convert the material to its finished product and then to sell those goods. Days inventory outstanding=Inventory/Cost of goods sold per day =$2,900,000/($29,000,000 x 80%/365) =$2,900,000/63,561.64383562 =45.625 =45.63 days Cost of goods sold per day = sales x 80% /365 used above 2nd On average, it takes 28.95 days from the time a sale is made until the time cash is collected from customers. Working Notes: Days sales outstanding =account receivable/revenue per day =$2,300,000/($29,000,000/365) =$2,300,000/79,452.0547945 =28.94827586 =28.95 days 3rd Extensive Enterprise relies on customer credit when it buys raw materials from its suppliers. On average, it takes 40.91 days after the firm purchases materials before it sends cash to its suppliers. Working Notes: days payable outstanding = Accounts Payable / (Cost of Goods Sold / Number of Days) =$2,600,000/($29,000,000 x 80%/365) =$2,600,000/63,561.64383562 =40.9051724 =40.91 days 4th Answer is 1st option 33.67 days Working Notes: cash conversion cycle = Days Inventory Outstanding + Days sales outstanding -days payable outstanding =45.625 + 28.948 - 40.905 =33.668 =33.67 days cash conversion cycle 33.67 days Please feel free to ask if anything about above solution in comment section of the question.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.