Week 3 Cash Conversion Cycle

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Cash Conversion Cycle
FIN/375 Version 3
University of Phoenix Material
Cash Conversion Cycle
The HDL, Inc. balance sheet and income statement for the year ending 20xx are as follows:
Balance Sheet
(In millions of Dollars)
ASSETS
Cash
Accounts Receivable
Average Inventory
Fixed Assets, net
TOTAL ASSETS
$6.0
14.0
12.0
40.0
——-$72.0
=====
LIABILITIES AND EQUITY
Accounts Payable
$10.0
Salaries and Benefits Payable 2.0
Other current Liabilities
10.0
Long-term debt
12.0
Equity
38.0
——-TOTAL EQUITY
$72.0
=====
Income Statement
(In millions of Dollars)
Net Sales
$100.0
Cost of Sales
60.0
Selling and admin. Expenses 20.0
Other Expenses
15.0
——-EARNINGS AFTER TAXES $5.0
=====
Assignment:
A. determine the length of the inventory conversion period.
B. determine the length of the receivables conversion period.
C. determine the length of the operating cycle.
D. determine the length of the payables deferral period.
E. determine the length of the cash conversion cycle.
(30 points)
Copyright © 2017 by University of Phoenix. All rights reserved.
1
Cash Conversion Cycle
FIN/375 Version 3
Formulas:
Inventory Conversion Period (ICP)
Average Inventory
————————Cost of Sales/365
Receivables Conversion Period (RCP) Accounts Receivable
————————Net Sales/365
Operating Cycle (OC)
ICP + RCP
Payables Deferral Period (PDP)
Accounts Payable + Salaries & Benefits
——————————————————Cost of Sales + Selling and admin.
Expenses/365
Cash Conversion Cycle
OC – PDP
Copyright © 2017 by University of Phoenix. All rights reserved.
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