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# Cash conversion cycle / trade credit

1. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firmâ??s cash conversion cycle. Using the following information and a 365-day year, what is the firmâ??s present cash conversion cycle?
Average inventory = \$75,000
Annual sales = \$600,000
Annual cost of goods sold = \$360,000
Average accounts receivable = \$160,000
Average accounts payable = \$25,000

3. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to \$450,000 per year. On average, how much â??freeâ? trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

#### Solution Preview

1. Cash Conversion Cycle = AR days + Inventory Days - Payable Days
AR days = Average Accounts Receivable/(Sales/365) = 160,000/(600,000/365) = ...

#### Solution Summary

The solution explains how to calculate the cash conversion cycle and the amount of trade credit

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