Cash conversion cycle The text identifies three principal components that jointl
ID: 2652209 • Letter: C
Question
Cash conversion cycle
The text identifies three principal components that jointly comprise the cash conversion cycle. The cash conversion cycle is defined as the average length of time a dollar is tied up in current assets, and it is determined by the interaction between the inventory conversion period, receivables collection period, and the payables deferral period. Ideally, a company wants to minimize the cash conversion cycle as much as possible. In some circumstances, a firm has a comparative advantage in working capital management because of the nature of its business. We will look at the cash conversion cycles of companies and their implications.
In your initial response to the topic you have to answer all 6 questions.
You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor.
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.
Select the firm's Balance Sheet. Write down the balances shown for the firm's inventories, accounts receivable, and accounts payable.
Using the information from parts a and b, calculate its inventory turnover, accounts receivable turnover, and accounts payable turnover. You should show your work!
Calculate production cycle, collection cycle, and accounts payable cycle. You should show your work!
What is the company’s cash conversion cycle? You should show your work!
Discuss the results that you receive in one paragraph. Should the company decrease cash conversion cycle? Please explain your answer.
In your responses to other students compare the cash conversion cycles of your company with the cash conversion cycle in another student’s posting. What factors are responsible for these differences? Are these differences firm specific or are they consequences of the nature of the businesses in which these firms operate? Please explain your answers.
Explanation / Answer
Company's name WALMART Year 2015 2014 All numbers in thousands Annual Sales 485,651,000 476,294,000 Cost of Good Sold 365,086,000 358,069,000 Inventories 45,141,000 44,858,000 Accounts Receivables 6,778,000 6,677,000 Accounts Payables 58,583,000 57,174,000 Inventory turnover = Cost of Goods Sold ÷ Average Inventory Average Inventory = (44,858,000+45,141,000)/2 44,999,500 Inventory turnover = 365,086,000/44,999,500 8.11 Accounts receivable turnover = Net Annual Credit Sales/Average receivables Average receivables = (6,677,000+ 6,778,000)/2 6,727,500.00 Accounts receivable turnover = 485,651,000/6,727,500 72.19 Accounts payable turnover = Purchases/(average accounts payables) Purchases = Cost of sales + Ending inventory – Starting inventory 365,369,000 Average Payables = (58,583,000+57,174,000)/2 57878500 Accounts payable turnover = 365,369,000/57,878,500 6.31 Calculate production cycle, collection cycle, and accounts payable cycle What is the company’s cash conversion cycle? Production Cycle = 365/ Inventory turnover; 365/8.11 45 days Collection Cycle = 365/Accounts receivable turnover; 365/ 72.19 5 days Accounts payable Cycle = 365/ Accounts payable turnover; 365/6.31 58 days Production cycle + Accounts receivable cycle – Payment cycle = Cash conversion cycle 108 days Discuss the results that you receive in one paragraph. Should the company decrease cash conversion cycle Walmart's Production cycle takes 45 days to convert inventory into sales ,collection cycle takes 5 days to collect cash from debtor and it takes 58 days to give payment to the creditors. The company can decrease the cash conversion cycle by reducing the production cycle.
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