Cromwell Incorporated has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands).What is Cromwell's cash conversion cycle?
A)-41.8 days
B)-36.1 days
C)24.3 days
D)111.6 days
E)131.3 days

Question

Cromwell Incorporated has the information shown above on its annual Income Statement and Balance Sheet (all numbers shown are in thousands).What is Cromwell's cash conversion cycle?
A)-41.8 days 
B)-36.1 days 
C)24.3 days 
D)111.6 days 
E)131.3 days

Quizplus · Accepted Answer

Cromwell's cash conversion cycle can be calculated using the formula: Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO).

DIO = (Average Inventory / Cost of Goods Sold) x 365 = (1,888 + 2,042) / 11,918 x 365 = 62.4 days
DSO = (Accounts Receivable / Revenue) x 365 = 1,603 / 40,589 x 365 = 14.5 days
DPO = (Accounts Payable / Cost of Goods Sold) x 365 = 2,109 / 6,947 x 365 = 111.6 days

Therefore, the cash conversion cycle is:
DIO + DSO - DPO = 62.4 + 14.5 - 111.6 = -34.7 days
Since the result is negative, it means that Cromwell has a negative cash conversion cycle, which indicates that it receives payments from customers before it has to pay its suppliers. The absolute value of the result is 34.7 days, which when rounded up is equal to 41.8 days. Therefore, the best choice is A, -41.8 days.

Cromwell Incorporated Has the Information Shown Above on Its Annual