Answer:
Inventory cycle = Inventory x 365 days
Cost of goods sold
= $75,000 x 365 days
$360,000
= 76 days
Receivable days = Receivables x 365 days
Sales
= $160,000 x 365 days
$600,000
= 97 days
Payable days = Payables x 365 days
Cost of goods sold
= $25,000 x 365 days
$360,000
= 25 days
Cash conversion cycle = Inventory cycle + Receivable days - Payable days
Cash conversion cycle = 76 + 97 - 25 = 148 days
Explanation:
Cash conversion cycle is the aggregate of inventory cycle and receivable days minus payable days. Inventory cycle is the ratio of inventory to cost of sales multiplied by 365 days. Receivable days measure the ratio of receivables to sales multiplied by 365 days. Payable days measure the ratio of payables to cost of sales multiplied by 365 days. Cash conversion cycle is the time lag between when inventory is purchased and when payment is made.
