Consider the following financial statement information: Assume all sales and purchases are on credit.How long is the cash cycle? (Use average balance sheet account balances.)

Question

Consider the following financial statement information:  Assume all sales and purchases are on credit.How long is the cash cycle? (Use average balance sheet account balances.)

Quizplus · Accepted Answer

The cash cycle is calculated using the formula:

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

Days Inventory Outstanding: (Inventory / Cost of Goods Sold) x 365

Days Sales Outstanding: (Accounts Receivable / Annual Credit Sales) x 365

Days Payable Outstanding: (Accounts Payable / Cost of Goods Sold) x 365

Using the average balance sheet account balances given in the problem:

Days Inventory Outstanding = (1833 / 6201) x 365 = 107.68 days

Days Sales Outstanding = (1506 / 8394) x 365 = 65.24 days

Days Payable Outstanding = (1065 / 6201) x 365 = 62.83 days

Cash Conversion Cycle = 107.68 + 65.24 - 62.83 = 110.09 days

Therefore, the answer is B) 116.09 days.

Consider the Following Financial Statement Information: Assume All Sales