Question

Rikan inc.'s credit sales for the year 2016 are $5,000,000, and its gross profit is $1,500,000. the company’s average inventories are $595,000. its average accounts receivable is $750,000 and average accounts payable is $640,000. from this information, calculate the company’s cash cycle. (round the answer to one decimal.)​

Answer 1

Given:
credit sales for the year 2016 are $5,000,000
gross profit is $1,500,000
average inventories are $595,000
average accounts receivable is $750,000
average accounts payable is $640,000.

Formula:
Cash Conversion Cycle = DSO + DIO – DPO

DSO: days sales outstanding = Average Accounts Receivable × 365 ÷ Credit Sales
DIO: days inventory outstanding = Average Inventories × 365 ÷ Cost of Goods Sold
DPO: days payables outstanding = Average Accounts Payable × 365 ÷ Cost of Goods Sold

DSO = (750,000 * 365) / 5,000,000 = 54.75 
DIO = (595,000 * 365) / 3,500,000 = 62.05
DPO = (640,000 * 365) / 3,500,000 = 66.74

Cost of Goods Sold = Sales - Gross Profit = 5,000,000 - 1,500,000 = 3,500,000

Cash Conversion Cycle = DSO + DIO – DPO
CCC = 54.75 + 62.05 - 66.74
CCC = 50.06

The company’s cash cycle is 50.06 days.