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a cash conversion cycle

The Phoenix Corporation is interested in examining its cash conversion cycle. Suppose a Phoenix manager has assembled the following data for your use:

$2.75 million Average Inventory
$1.05 million Average Accounts receivable
$0.60 million Average Accounts payable
$0.45 million Wages, benefits, and payroll taxes payable
$75.0 million Sales
$40.0 million Cost of sales
$6.30 million Selling, general, and administrative expenses

Estimate each of the following:
a. Inventory conversion period
b. Receivables collection period
c. Payables deferral period
d. Operating cycle
e. Cash conversion cycle

Solution Preview

In order to answer these questions, you must be familiar with a few formulas.

(a) Inventory collection period = average inventory / (cost of goods sold / 365)
= 2.75 million / (40.0 million / 365) = 2.75 / 1.110 = 25 days

Remember to use cost of goods sold or cost of sales in the denominator here because we are calculating a measure of ...

Solution Summary

A cash conversion cycle is clearly assessed.