9.6 Cash Conversion Cycle: Practice Problem
Another Sample Company, Inc.
($ Thousands)
| Cash and Equivalents | 1,200 | Accounts Payable | 650 |
| Inventories | 700 | Short-term Debt | 6,600 |
| Accounts Receivable | 2,200 | Total Current Liabilities | 7,250 |
| Total Current Assets | 4,100 | Long-term Bonds | 5,500 |
| Property, Plant & Equip. | 12,000 | Common Stock | 3,500 |
| Other | 2,500 | Retained Earnings | 2,350 |
| Total Long-term Assets | 14,500 | Total Owners’ Equity | 5,850 |
| Total Assets | 18,600 | Total Liabilities + Equity | 18,600 |
Credit Sales = $22,450,000 COGS = $5,150,000
| Solve: | Formula | Calculation | Answer |
| PPP= | (Accts. Payable ÷ COGS)(360)= | ||
| ICP= | (Inventory ÷ COGS)(360)= | ||
| ACP= | (Accts. Rec’v ÷ Credit Sales)(360)= | ||
| CCC | ICP + ACP= | ||
| CFP | ICP + ACP – PPP= |
- This company’s Cash Conversion cycle is _____ days. What does this mean?
- Do you have any comments about this company? Can you draw the timeline?
| Solution: | Formula | Calculation | Answer |
| PPP= | (Accts. Payable ÷ COGS)(360)= | (650/5,150)(360)= | 45.4 Days |
| ICP= | (Inventory ÷ COGS)(360)= | (700)/5,150)(360)= | 48.9 |
| ACP= | (Accts. Rec’v ÷ Credit Sales)(360)= | (2,200)(22,450)(360)= | 35.3 |
| CCC | ICP + ACP= | 48.9 + 35.3 | 84.2 |
| CFP | ICP + ACP – PPP= | 48.9 + 35.3 – 45.4 = | 38.8 |
- This means that it has to obtain some short-term financing for 38.8 days. (“CFP”)
- It takes 84.2 days from the time it orders raw materials (or finished inventory) until it collects on its receivables. In this timeline, it pays its Payables in 45.4 days.
- Here’s the Timeline:
| 0 | 45.4 | 48.9 | 84.2 |
| Buy Inventory | Pay A/P | Sell Inventory | Collet A/R |