Suppose that LilyMac Photography has annual sales of $290,000; cost of goods sold of $155,000; average inventories of $3,500; average accounts receivable of $21,000; and an average accounts payable balance of $10,000. Assuming that all of LilyMac's sales are on credit, what will be the firm's cash cycle?
Firm's Cash Cycle:
The cash conversion cycle is a cash flow calculation that attempts to measure the time it takes a company to convert its investment in inventory and other resource inputs into cash. In other words, the cash conversion cycle calculation measures how long cash is tied up in inventory before the inventory is sold and cash is collected from customers.
Answer and Explanation: 1
The values we have from the question is,
Average Inventory = $3,500,
Account Receivable = $21,000
Account Payable = $10,000
COGS = $155,000,
Sales = $290,000
Cash conversion cycle is the time it takes for a company to convert the raw materials into finished goods, sell all the goods and collect the amount from the customers.
Cash cycle is calculated using the below formula.
- Firm's Cash Cycle = Days Inventory Outstanding + Days Sales Outstanding + Days Payable Outstanding
- Days Inventory Outstanding= Inventory*365/COGS
- Days Sales Outstanding= Accounts Receivable*365/Net Credit Sales
- Days Payable Outstanding= Accounts Payable*365/COGS
Let's put all the values in the formula
- Firm's Cash Cycle = 365* (3,500/155,000+ 21,000/290,000 + 10,000/155,000)
- Firm's Cash Cycle = 365* (0.0226 + 0.0724 + 0.0645) =
- Firm's Cash Cycle = 365* (0.1595) = 58.22 days
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fromChapter 17 / Lesson 2
The operating cycle and cash conversion cycle are both tools to evaluate the timeline of when a business will become profitable. Explore the calculations of each, and identify their importance to a business.