Cash Conversion Cycle Carroll &

2

(16.1) Cash conversion cycle

5.

Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000; and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days, and it pays on time. The firm is searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000, by how many days would the cash conversion cycle be changed? Use a 365-day year.

a.

-27.4

b.

-28.7

c.

-30.2

d.

-31.7

e.

-33.3

The cash conversion cycle is inventory conversion cycle + a/R cycle — a/P cycle.

The old cash conversion cycle must first be determined.

(20,000,000 / 219178) + (16,000,000 / 219178) — 35

= 91.25 + 73 — 35 = 129.25

The new cash

(16,000,000 / 219178) + (14,000,000 / 219178) — 35

73 + 63.87 — 35 = 101.87

The difference is the degree to which the cash conversion cycle is shortened: 129.25 — 101.87 = 27.38

(16.4) Cash budget

6.

Nagel Corporations budgeted monthly sales are $5,000, and they are constant from month to month. Its customers pay as follows: 40% pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next.

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