5. Cash conversion cycle Aa Aa Cash management is a very important function of m

Question

5. Cash conversion cycle Aa Aa Cash management is a very important function of managers. Companies need to manage their operations in a way that they can sustain growth and yet not run out of cash. Consider the case of the Extensive Enterprise Inc.: Extensive Enterprise Inc. has forecasted sales of $28,000,000 for next year and expects its cost of goods sold (COGS) to remain at 80% of sales. Currently, the firm holds $3,200,000 in inventories, $1,900,000 in accounts receivable, and $2,500,000 in accounts payable. Approximately how long does it take Extensive Enterprise to convert its raw materials to its finished products and then to sell those goods? (Note: In all calculations, assume that there are 365 days in a year.) O 52.14 days O 49.53 days O 39.11 days O 41.71 days On average, it takes from the time a sale is made until the time cash is collected from customers. Extensive Enterprise relies on customer credit when it buys raw materials from its suppliers. On average, it takes after the firm purchases materials before it sends cash to its suppliers. What is the length of Extensive Enterprise's cash conversion cycle (CCC)? O 36.17 days O 45.21 days 32.55 days 37.98 days

Explanation / Answer

As per rules I am answering the first 4 sub-parts of this question

1. This is measured by Days inventory outstanding ratio = Inventories/ COGS * 365 days

= 3200000* 365/ (28000000*80%)

= 52.14 days

2. This ratio is measured by length of Average collection period or days sales outstanding

= Average AR * 365/Net credit sales

= 365 *1900000/ 28000000

= 24.768 days

3. Days payable outstanding = Accounts payable* 365 / Purchases

= 2500000*365/ 28000000*80%

= 40.737 days

4. CCC = DIO+ DSO- DPO = 52.14+ 24.77- 40.74 =

36.17 days

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