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
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 ...
A cash conversion cycle is clearly assessed.