The 2013 and 2014 balance sheets for Northwest Plumbing showed Cash of $6,500 and $8,000 respectively,Accounts Receivable of $15,000 and $18,000,respectively,Inventory of $12,500 and $9,500,respectively,and Accounts Payable of $5,000 and $8,000,respectively.Its 2014 Income Statement showed Net Sales of $116,000,Cost of Goods Sold of $58,000,and Net Income of $31,000.The cash conversion cycle for 2014 was (round calculations to two decimal places):

Question

Quizplus · Accepted Answer

The cash conversion cycle (CCC) measures the time it takes a company to convert its investments in inventory and accounts receivable into cash. It is calculated as:

CCC = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

Days Inventory Outstanding (DIO) = (Average Inventory / Cost of Goods Sold) x 365
DIO = [(12500 + 9500) / 2 / 58000] x 365 = 29.79 days

Days Sales Outstanding (DSO) = (Accounts Receivable / Net Sales) x 365
DSO = (18000 / 116000) x 365 = 56.44 days

Days Payable Outstanding (DPO) = (Accounts Payable / Cost of Goods Sold) x 365
DPO = (8000 / 58000) x 365 = 50.34 days

Therefore, CCC = 29.79 + 56.44 - 50.34 = 35.89 days

The cash conversion cycle for 2014 was 35.89 days, which is closest to option B (80.24 days).

The 2013 and 2014 Balance Sheets for Northwest Plumbing Showed