Canadian Products is concerned about managing its operating assets and liabiliti

Question

Canadian Products is concerned about managing its operating assets and liabilities efficiently. Inventories have an average age of 140 days, and accounts receivable have an average age of 70 days. Accounts payable are paid approximately 40 days after they arise. The firm has annual sales of $36 million, its cost of goods sold represents 75% of sales, and its purchases represent 70% of cost of goods sold. Assume a 365-day year.

Calculate the firm's operating cycle.
     ____ days

Calculate the firm's cash conversion cycle.
     ___ days

Calculate the amount of total resources Canadian Products has invested in its CCC. Round your answer to the nearest dollar.
$ ____

Explanation / Answer

Operating Cycle = Days Sales of Inventory + Days Sales Outstanding = 140 days + 70 days = 210 days. Cash Conversion Cycle = Operating Cycle - Days Payables Outstanding = 210 days - 40 days = 170 days. CCC for Canadian Products using the formulae given above Days Sales of Inventory = 365 / Purchase X Average Inventory Purchases = 70% of 75% of Sales (75% of Sales is Cost of Goods Sold) Therefore, Purchases = 70% X 75 X $ 36,000,000 = 18900000 = $18.9 million Hence, Average Inventory = $ 18.9 X 140 / 365 = $ 7.2 million A Average Accounts Receivable = 70 X $ 36 / 365 = $ 6.9 million B Average Accounts Payable = 40 X $ 27 / 365 = $ 3.0 million C Cost of Goods Sold = 75% of Sales = 75% of 36 million or $ 27 million CCC = A + B - C $ 11.2 million or $ 11,200,000.

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