3) The Cash-to-Cash Conversion Cycle

The cash-to-cash conversion cycle identifies cash flows from the time costs are incurred (such as raw material inventory) to when it is paid (account receivable).

Cash-to-cash conversion cycle = +

where

= Average total inventoryCost of goods sold per day

= Accounts receivable value/Revenue per day

= Accounts payable value/Revenue per day

Revenue per day = Total revenueOperating days per year

Problem : Evaluating Cash-to-Cash Conversion Cycle

a. Evaluate the cash-to-cash conversion cycle for a company that has

* annual sales of $3.5 million

* annual cost of goods sold of $2.8 million

* 250 operating days a year total average on-hand inventory of $460,000

* $625,000 in accounts receivable

*$900,100 in accounts payable.

Solution: Evaluating Cash-to-Cash Conversion Cycle

*CGS/D=

*R/D=

*IDS=

*ARDS=

*APDS=

b. what can you conclude about the companys operating practices?