Question 1: Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle?
Average inventory = $75,000
Annual sales = $875,000
Annual cost of goods sold = $525,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
a. 118.8 days
b. 101.5 days
c. 107.6 days
d. 105.6 days
e. 79.2 days
Question 2: Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
| |
Original |
Revised |
| Annual sales: unchanged |
$124,000 |
$124,000 |
| Cost of goods sold: unchanged |
$80,000 |
$80,000 |
| Average inventory: lowered by $4,000 |
$20,000 |
$16,000 |
| Average receivables: lowered by $2,000 |
$16,000 |
$14,000 |
| Average payables: increased by $2,000 |
$10,000 |
$12,000 |
| Days in year |
365 |
365 |
a. 36.3
b. 39.2
c. 33.3
d. 39.6
e. 34.6