Zane Corporation has an inventory conversion period of 48 days, an average collection period of 30 days, and a payables deferral period of 29 days. Assume 365 days in a year for calculations.
a. What is the length of the cash conversion cycle?
b. If Zane's annual sales are $4,154,530 and all sales are on credit, what is the investment in accounts receivable?
c. How many times per year does Zane turn over its inventory?
Assume that the cost of goods sold is 75% of sales.
Cash Conversion Cycle:
The cash conversion cycle is the time taken by a company to convert its cash paid for raw materials to cash collected from its sales. It is affected by the lengths of the inventory conversion period, the average collection period and the payable deferral period.
Answer and Explanation: 1
Cash conversion cycle
= Inventory conversion period + Average collection period - Payable deferral period
= 48 + 30 - 29
= 49 days.
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fromChapter 17 / Lesson 2
The operating cycle and cash conversion cycle are both tools to evaluate the timeline of when a business will become profitable. Explore the calculations of each, and identify their importance to a business.