Cash conversion cyble. American Products is concerned about managing cash effici
ID: 2654166 • Letter: C
Question
Cash conversion cyble. American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Cost of goods sold are $30 million, and purchases are $30 million.
a. Calculate the firm's operating cycle.
b. Calculate the firm's cash conversion cycle.
c. Calculate the amount of resources needed to support the firm's cash concersion cycle.
d. Discuss how management might be able to reduce the cash concersion cycle.
Explanation / Answer
Answer:
Operating cycle = Inventory age + Receivables age =90 +60 = 150 Days
Cash conversion cycle = Operating cycle – Accounts Payable age
=150 -30 = 120 Days
Amount of resources needed to support the firm's cash conversion cycle =
Sales * Receivable age / 360 + Cost of Good sold * Inventory age / 360 – Purchases * Payables age / 360
=$30 Million *90 /360 + $30 Million *60 /360 -$30 Million *30 /360
=$30 Million *120 /360
= $ 10 MILLION
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