Cash conversion cycle: American Products is concerned about managing cash effici
ID: 2756822 • Letter: C
Question
Cash conversion cycle: American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts recievable 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 $20 million, and purchases are $15 million.
A). Calculate the firms’s operating cycle.
B). Calculate the firm’s cash conversion cycle.
C). Calculate the amount of resources needed to support the firm’s cash conversion cycle.
D). Discuss how management might be able to reduce the cash conversion cycle.
Explanation / Answer
Answer:A) Calculation of the firms’s operating cycle:
Operating Cycle=AVG AGE OF INV. + A/R AGE (ACCOUNT COLLECTION PERIOD)
=90 days+60 days=150 days
Answer:B) Calculation of the firm’s cash conversion cycle:
Cash Conversion cycle=operating cycle-Average age of Accounts payable
=150 days-30 days
=120 days
Answer:C) Calculation of the amount of resources needed to support the firm’s cash conversion cycle:
Cash need = 30Million*120/365 = $9863014
Answer:D)
Cash conversion cycle consists of three parts. By managing each of them individually we can reduce the cash conversion cycle:
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