Cash Conversion Cycle, Account Recievable & Payable days
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The Hamlin Corporation has an inventory conversion period of 60 days, a receivables collection period of 30 days, and a payables deferral period of 28 days. Its annual credit sales are $5,000,000, and its annual credit purchases are $3,500,000.
a. What is the length of the firm's cash conversion cycle?
b. What is the firm's investment in accounts receivable?
c. What is the firm's level of accounts payable?
d. Calculate how many times a year the company's inventory is turned over.
e. Identify three ways in which the company could reduce its cash conversion cycle? What are possible risks in reducing it?
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Solution Summary
The solution provide cash conversion cycle formula and calculates firm's investment in accounts receivable, firm's level of accounts payable, length of the firm's cash conversion cycle.
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(A)Cash Conversion Cycle (CCC) = Inventory conversion period + Receivables conversion period - Payables conversion period
We have Inventory days = 60; Receivable days = 30; Payable days = 28 days.
Inputing these values in above equation we have
CCC = 60+30-28 = 62 days
(B) Avg. Receivable days = Avg Accounts Receivable/(Revenue/365)
Given Revenue = 5,000,000 and Receivable days = 30. In putting these value in the equation we ...
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