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Day Per Sold Goods of Cost Inventory

Primrose Corp has annual sales of $15 million. It has inventory of $2 million, accounts receivable of $3 million, and accounts payable of $1 million. Its cost of goods sold is 80% of sales. Primrose finances working capital with bank loans at an annual interest rate of 8%. Primrose's cash conversion cycle is 103.41 days. This is calculated as the inventory conversion period of 60.83 days plus the average collection period of 73 days, minus the payables deferral period of 30.42 days. The question does not calculate the new cash conversion cycle if inventory and receivables are lowered by 10% and payables increased by 10%.
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0% found this document useful (0 votes)
36 views2 pages

Day Per Sold Goods of Cost Inventory

Primrose Corp has annual sales of $15 million. It has inventory of $2 million, accounts receivable of $3 million, and accounts payable of $1 million. Its cost of goods sold is 80% of sales. Primrose finances working capital with bank loans at an annual interest rate of 8%. Primrose's cash conversion cycle is 103.41 days. This is calculated as the inventory conversion period of 60.83 days plus the average collection period of 73 days, minus the payables deferral period of 30.42 days. The question does not calculate the new cash conversion cycle if inventory and receivables are lowered by 10% and payables increased by 10%.
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16-1 Cash Conversion Cycle.

Primrose Corp has $15 million of sales, $2 million of


inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is
80% of sales, and its finances working capital with bank loans at an 8% rate. what is
Primrose's cash conversion cycle? If Primrose could lower its inventories and receivables
by 10% each and increase its payables by 10% all without affecting sales or cost of goods
sold, what would be the new CCC, how much cash would be freed up, and how would
that affect pretax profits? (answer the 1st part of the problem. Do not calculate the new
CCC when lowering inventories by 10% and increasing payables by 10%)

1. Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P =


$1,000,000; COGS = 0.8(Sales); Interest on bank loan = 8%; CCC = ?

CCC = Inventory conversion period + Average collection period


Payables deferral period.

Inventory
Inventory conversion period = Cost of goods sold per day
$2,000,000
=
[(0.8)($15,000,000)]/365
$2,000,000
= $32,876.7123
= 60.83 days.

Receivable s
Average collection period = Sales/365
$3,000,000
= $15,000,000 /365
= 73 days.

Payables
Payables deferral period = Cost of goods sold/365
$1,000,000
= $32,876.7123
= 30.42 days.

CCC = 60.83 + 73 30.42 = 103.41 days.

16-4 CCC- Zocco Corporation has an inventory conversion period of 75 days, an average
collection period of 38 days, and a payables deferral period of 30 days. A-What is the
length of the cash conversion cycle? B- If Zoccos annual sales are $3,421,875 and all
sales are on credit, what is the investment in accounts receivable? C- How many times
per year does Zocco turn over its inventory?
Cash Inventory Receivable s Payables
a. conversion = conversion collection deferral
cycle period period period
= 75 + 38 30 = 83 days.

b. Average sales per day = $3,421,875/365 = $9,375.

Investment in receivables = $9,375 38 = $356,250.

c. Inventory turnover = 365/75 = 4.87.

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