Go to http://finance.yahoo.com and get a quote for one company of your choice. O

Question

Go to http://finance.yahoo.com and get a quote for one company of your choice. On the left column, scroll down and select “Income Statement.” Write down the annual sales and cost of goods sold for the most recent two years.

Company: Microsoft Corporation (MSFT)

Annual Sales: 86,833,000 (2014); 77,849,000 (2013)

Cost of Goods Sold: 26,934,000(2014); 20,249,000 (2013)

Select the firm's Balance Sheet. Write down the balances shown for the firm's inventories, accounts receivable, and accounts payable.

Inventories: 2,660,000 (2014); 1,938,000 (2013)

Accounts Receivable: 21,485,000 (2014); 19,118,000 (2013)

Accounts Payable: 13,569,000 (2014); 10,182,000 (2013)

Using the information from parts a and b, calculate its inventory turnover, accounts receivable turnover, and accounts payable turnover. You should show your work!

Inventory Turnover: 26,294,000/ (2,660,000+1,938,000)/2 = 2.85

Accounts Receivable Turnover: 86,833,000/(21,485,000+19,118,000)/2 = 1.07 (rounded)

Accounts Payable Turnover: 26,294,000/ (13,569,000+10,182,000) /2 = 0.553

Calculate production cycle, collection cycle, and accounts payable cycle. You should show your work!

Production Cycle: 365 * 2.85

Collection Cycle:

Accounts Payable Cycle:

What is the company’s cash conversion cycle? You should show your work!

Cash Conversion Cycle:

Discuss the results that you receive in one paragraph. Should the company decrease cash conversion cycle? Please explain your answer.

Explanation / Answer

The answer is as follows:

Inventory days on hand = Inventory / Daily cost of goods sold

Daily cost of goods sold = Cost of goods sold /365 = 26,934,000/365 = $73,792.

Inventory days on hand = Inventory / Daily cost of goods sold
                                  = 2,660,000 / $73,792 = 36.047 days.

Average collection period = Accounts receivable / daily sales

Daily sales = Annual sales / 365 = 86,833,000/365 = 237,898.63.

Average collection period = Accounts receivable / daily sales = $21,485,000 / $237,898.63 = 90.311 days.

Days Payable Outstanding = Accounts Payable / Daily COGS

                                        = $13,569,000 / $73,792 = 183.88 days.

Cash Conversion Cycle = Inventory Days on Hand + Average Collection Period - Days Payable Outstanding

                                   = 36.047 + 90.311 - 183.88 = -57.522 days.

The cash conversion cycle for 2014 is negative as the days payable outsatending is very high. it should be reduced by increasing the credit purchases or by increasing the average collection period and Inventory days on hand by collecting the accounts recivable from the customers early than the period now.

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