10. Data on Shick Inc. for 2008 are shown below, along with the days sales outst

Question

10. Data on Shick Inc. for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $94,000 Accounts receivable $16,000 Days Sales Outstanding (DSO) 62.13 Benchmarks' Days Sales Outstanding (DSO) 20.00

a. $9,873
b. $8,788
c. $11,283
d. $10,849
e. $11,392
____ 11. Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 80% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

a. 23.8 days
b. 21.2 days
c. 24.3 days
d. 26.0 days
e. 23.6 days

____ 12. Data on Shin Inc for 2008 are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Note: This question is worth 2 points.
Cost of goods sold = $78,000 Inventory = $20,000 Inventory Conversion Period (ICP) = 93.59
Benchmark Inventory Conversion Period (ICP) = 38.00

a. $11,285
b. $10,335
c. $14,612
d. $10,216
e. $11,879

Explanation / Answer

1) The formula for calculating the Days sales outstanding is DSO = (Accounts receivables / Creidit sales) * 365 days 20.00 = (AR / $94,000) * 365 0.055 = AR / $94,000 AR = $5151 Therefore, the accounts receivables should be $5151 to reach the benchmark. Accounts receivables to be declined is ($16,000 - $5151 = $10,849) Correct option is d) $10,849 2) The formula for calculating the Inventory conversion period is ICP = Inventory / (Cost of sales / 365) ICP = Inventory / (Cost of sales / 365) COGS = $2,000,000 Inventory = 80% ($2,000,000)                = $1,600,000 ICP = $1,600,000 / ($2,000,000 / 365)        = $1,600,000 / 5479.45        = 292 days From the given figures, the ICP came to 292 days. Please check the figures if there is any error or requires any correction. 3)The formula for calculating the Inventory conversion period is ICP = Inventory / (Cost of sales / 365) 38.00 = Inventory / ($78,000 / 365) 38.00 = Inventory / 213.7 Inventory = $8120.6 Therefore, the inventory must be reduced by ($20,000 -$8121 = $11,879) The correct option is e) $11,879

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