Purchase Solution

An Analysis of Cash Conversion Cycles

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Part1:
Look up and use the formulas for the components of the cash conversion cycle for the following scenario (see questions below the financial statements):

Hewy, Dewy, and Lewy Inc. balance sheet and income statement for the year ending 20xx are as follows:

Balance Sheet
(in millions of Dollars)

ASSETS

Cash \$6.0
Accounts Receivable 14.0
Inventories 12.0
Fixed Assets, net 40.0
---------
TOTAL ASSETS \$72.0
=====

LIABILITIES AND EQUITY

Accounts Payable \$10.0
Salaries and Benefits Payable 2.0
Other current Liabilities 10.0
Long-term debt 2.0
Equity 38.0
--------
TOTAL EQUITY \$72.0
=====

Income Statement
(in Millions of Dollars)

Net Sales \$100.0
Cost of Sales 60.0
Other Expenses 15.0
--------
EARNINGS AFTER TAXES \$5.0
=====

a. determine the length of the inventory conversion period
b. determine the length of the receivables conversion period
c. determine the length of the operating cycle
d. determine the length of the payables deferral period
e. determine the length of the cash conversion cycle
f. what is the meaning of the number that you calculated in part e?

Part 2:
Now, lets say that you are in upper management, and you want to "tighten your ship" a little to increase your cash flow just on current operations. You ask for the following goals -- which are very reasonable:

1) a 10% decrease in average inventory.
2) a 10% decrease in accounts receivable.
3) a 10% increase in accounts payable.

Solution Summary

The Solution uses the cash conversion cycle for Hewy, Dewy, and Lewy Inc to address goals of increasing the company's cash flow.

Solution provided by:
Education
• MBA, Merage School of Business, Univ of Cal, Irvine
• BA, Univ of Cal, Irvine
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