12.1 Wolfgang’s Masonry management estimates that it takes the company 22 days o

Question

12.1

Wolfgang’s Masonry management estimates that it takes the company 22 days on average to pay its suppliers. Management also knows that the company has days’ sales in inventory of 58 days and days’ sales outstanding of 25 days. How does Wolfgang’s cash conversion cycle compare with the industry average of 66 days? Please answer all 3

1) Wolfgang’s cash conversion cycle is ________ days.

2) Wolfgang’s cash conversion cycle is (greater than | equal to | less than) the industry average.

3) The Firm is (equally efficient | less efficient | more efficient) than other firms in the industry in managing its working capital.

Explanation / Answer

Days Sales Outstanding (DSO) = 25 days

Days Payable Outstanding (DPO) = 22 days

Days Sales Inventory (DSI) = 58 days

industry average for cash conversion cycle = 66 days

Cash conversion cycle = DSO + DSI - DPO = 58 + 25 - 22 = 61 days

This is less than the industry average of 66 days, the firm is more efficient than other firms in the industry in managing its working capital

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