Answer:
Inventory cycle = Inventory x 365 days
Cost of goods sold
Inventory cycle = $75,000 x 365 days
$360,000
= 76.04 days
Receivable days = Accounts receivable x 365 days
Sales
= $160,000 x 365 days
$600,000
= 97.33 days
Payable days = Accounts payable x 365 days
Cost of sales
= $25,000 x 365 days
$360,000
= 25.35 days
Cash conversion cycle
= Inventory cycle + Receivable days - Payable days
= 76.04 days + 97.33 days - 25.35 days
= 148.0 days
Explanation:
Cash conversion cycle is calculated as raw inventory cycle plus receivable days minus payable days. Inventory cycle is the ratio of inventory to cost of goods sold multiplied by number of days in a year. Receivable days refer to the ratio of accounts receivable to sales multiplied by number of days in a year. Payable day is the ratio of accounts payable to cost of goods sold multiplied by number of days in a year.
