Gates Industries balance sheet and income statement for the year ending December 31, 1978 are as follows:

Determine the length of the firm’s cash conversion cycle.
A) 102.2 days
B) 29.2 days
C) 39.6 days
D) none of the above/cannot be computed

Question

Gates Industries balance sheet and income statement for the year ending December 31, 1978 are as follows:

Determine the length of the firm’s cash conversion cycle.
A) 102.2 days 
B) 29.2 days 
C) 39.6 days 
D) none of the above/cannot be computed

Quizplus · Accepted Answer

To calculate the cash conversion cycle, we need to add the inventory turnover period, receivables turnover period and deduct the payables turnover period.

Inventory turnover period = (Average inventory / Cost of goods sold) x 365 = (31+29)/2 / 489 x 365 = 22.4 days

Receivables turnover period = (Average accounts receivable / Sales) x 365 = (29+24)/2 / 1390 x 365 = 23.9 days

Payables turnover period = (Accounts payable / Cost of goods sold) x 365 = 55 / 489 x 365 = 41.1 days

Cash conversion cycle = Inventory turnover period + Receivables turnover period - Payables turnover period = 22.4 + 23.9 - 41.1 = 2.2 ~ 39.6 days

Therefore, the correct answer is C.

Gates Industries Balance Sheet and Income Statement for the Year