What is the cash conversion cycle for a firm with $3 million average inventories,$1.5 million average accounts payable,a receivables period of 40 days,and an annual cost of goods sold of $18 million?

Question

Quizplus · Accepted Answer

The formula for calculating the cash conversion cycle (CCC) is:

CCC = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

First, we need to calculate the inventory conversion period:

Inventory Conversion Period = (Average Inventory / Cost of Goods Sold) x 365

Inventory Conversion Period = ($3,000,000 / $18,000,000) x 365 = 60.83 days

Next, we need to calculate the receivables collection period, which is already given as 40 days.

Finally, we need to calculate the payables deferral period:

Payables Deferral Period = (Average Accounts Payable / Cost of Goods Sold) x 365

Payables Deferral Period = ($1,500,000 / $18,000,000) x 365 = 30.42 days

Now, we can calculate the CCC:

CCC = Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period

CCC = 60.83 + 40 - 30.42 = 70.41 days

Therefore, the answer is C, 70.41 days.

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