Gates Industries' balance sheet and income statement for the year ending December 31, 2014 are as follows: $\text { Balance Sheet ( } \$ \text { million) }$
$\begin{array}{lrlr}
\text { Cash } & \$ 10.0 & \text { Accounts payable } & \$ 15.0 \
\text { Accounts receivable } & 15.0 & \text { Salaries, benefits, \& payroll taxes payable } & 3.0 \
\text { Inventories* } & 12.0 & \text { Long-term debt } & 15.0 \
\text { Fixed assets (net) } & 30.0 & \text { Stockholders' equity } & 34.0\
\text { Total assets }&\$67.0&\text { Total liab. \& stock equity }&\$67.0
\end{array}$ ? $\begin{array}{ll}
\text {Income Statement ( $ \$ $ million) }& \\
\text {Net sales (all credit) }&\$125.0 \
\text {Cost of sales }&75.0 \
\text {Selling general, \& admin. expenses }& 30.0\
\text {Other expenses }&13.0\
\text {Earnings after tax }&\$7.0 \
\end{array}$
? *Note: Average inventories also equal $12.0 million.
Determine the length of the firm's cash conversion cycle.

Question

Gates Industries' balance sheet and income statement for the year ending December 31, 2014 are as follows: $\text { Balance Sheet ( } \$ \text { million) }$
$\begin{array}{lrlr}
\text { Cash } & \$ 10.0 & \text { Accounts payable } & \$ 15.0 \
\text { Accounts receivable } & 15.0 & \text { Salaries, benefits, \& payroll taxes payable } & 3.0 \
\text { Inventories* } & 12.0 & \text { Long-term debt } & 15.0 \
\text { Fixed assets (net) } & 30.0 & \text { Stockholders' equity } & 34.0\
\text { Total assets }&\$67.0&\text { Total liab. \& stock equity }&\$67.0
\end{array}$ ? $\begin{array}{ll}
\text {Income Statement ( $ \$ $ million) }& \\
\text {Net sales (all credit) }&\$125.0 \
\text {Cost of sales }&75.0 \
\text {Selling general, \& admin. expenses }& 30.0\
\text {Other expenses }&13.0\
\text {Earnings after tax }&\$7.0 \
\end{array}$
 ? *Note: Average inventories also equal $12.0 million.
Determine the length of the firm's cash conversion cycle.

Quizplus · Accepted Answer

The cash conversion cycle is calculated as Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO). DIO = (Inventories / Cost of Sales) * 365 = (12 / 75) * 365 = 58.4 days. DSO = (Accounts Receivable / Net Sales) * 365 = (15 / 125) * 365 = 43.8 days. DPO = (Accounts Payable / Cost of Sales) * 365 = (15 / 75) * 365 = 73 days. Cash Conversion Cycle = 58.4 + 43.8 - 73 = 29.2 days. However, the correct answer should be 29.2 days, which matches choice B, but the question asks for the length of the cycle, which is 39.6 days (DIO + DSO).

Gates Industries' Balance Sheet and Income Statement for the Year Balance Sheet ( $ million) \text { Balance Sheet ( } \$ \text { million) } Balance Sheet ( $ million)

Gates Industries' Balance Sheet and Income Statement for the Year $\text { Balance Sheet ( } \$ \text { million) }$