Black Sheep Broadcasting Company is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year: Annual sales $10,200,000 Cost of goods sold $7,140,000 Inventory $3,100,000 Accounts receivable $1,900,000 Accounts payable $2,500,000 Black Sheep Broadcasting's CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value Inventory Conversion Period Average collection period Payables Deferral Period Cash conversion cycle Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in its denominator. Why do these measures use different inputs? Inventory and accounts payable are carried at cost on the balance sheet, whereas accounts receivable are recorded at the price at which goods are sold. Current assets should be divided by sales, but current liabilities should be divided by the COGS. The management at Black Sheep Broadcasting Company wants to continue its internal discussions related to its cash management. One of the finance team members presents the following case about Purple Panda Importers to his cohorts: Case in Discussion Purple Panda Importers's management plans to finance its operations with bank loans that will be repaid as soon as cash is available. The company's management expects that it will take 40 days to manufacture and sell its products and 35 days to receive payment from its customers. Purple Panda's CFO has told the rest of the management team that they should expect the length of the bank loans to be approximately 75 days. Which of the following responses to the CFO's statement is most accurate? The CFO is not taking into account the amount of time the company has to pay its suppliers. Generally, there is a certain length of time between the purchase of materials and labor and the payment of cash for them. The CFO can reduce the estimated length of the bank loan by this amount of time. The CFO's approximation of the length of the bank loans should be accurate, because it will take 75 days for the company to manufacture, sell, and collect cash for its goods. All these things must occur for the company to be able to repay its loans from the bank. Grade It Now Save & Continue Continue without saving Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller. Consider this case: Free Spirit Industries Inc. buys most of its raw materials from a single supplier. This supplier sells to Free Spirit on terms of 1.5/15, net 30. (Note: Round all intermediate calculations to four decimal places, and your The cost per period of the trade credit extended to Free Spirit is final answer to two decimal places.). assuming a 365-day year. (Note: Round all intermediate calculations to four Free Spirit's trade credit has a nominal annual cost of decimal places, and your final answer to two decimal places.) If Free Spirit Industries Inc.'s supplier shortens its discount period to five days, this will the cost of the trade credit
