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Question 8Tips2 ptsAn analyst gathers the following data for a firm:Sales: $2,500Cost of Goods Sold: $720Interest Paid: $26Net Income: $102Total Assets: $106,500Equity: $56,225Inventory: $180Accounts Receivables: $108Accounts Payables: $142Based on this information, what is the firm's Operating Cash Conversion Cycle (in days)?

Question

Question 8Tips2 ptsAn analyst gathers the following data for a firm:Sales: 2,500CostofGoodsSold:2,500Cost of Goods Sold: 720Interest Paid: 26NetIncome:26Net Income: 102Total Assets: 106,500Equity:106,500Equity: 56,225Inventory: 180AccountsReceivables:180Accounts Receivables: 108Accounts Payables: $142Based on this information, what is the firm's Operating Cash Conversion Cycle (in days)?

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Solution

The Operating Cash Conversion Cycle (OCCC) is a measure of how long it takes a company to convert its investment in inventory and other resources into cash flows from sales. It is calculated as the sum of the Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).

Here's how to calculate each component:

  1. Days Inventory Outstanding (DIO): This is the average number of days that a company holds its inventory before selling it. It is calculated as (Inventory / Cost of Goods Sold) x 365.

    Using the given data, DIO = (180 / 720) x 365 = 91.25 days.

  2. Days Sales Outstanding (DSO): This is the average number of days that a company takes to collect revenue after a sale has been made. It is calculated as (Accounts Receivables / Sales) x 365.

    Using the given data, DSO = (108 / 2500) x 365 = 15.84 days.

  3. Days Payable Outstanding (DPO): This is the average number of days it takes a company to pay its bills to its trade creditors. It is calculated as (Accounts Payables / Cost of Goods Sold) x 365.

    Using the given data, DPO = (142 / 720) x 365 = 71.97 days.

Finally, the Operating Cash Conversion Cycle is calculated as DIO + DSO - DPO.

So, OCCC = 91.25 + 15.84 - 71.97 = 35.12 days.

Therefore, the firm's Operating Cash Conversion Cycle is approximately 35 days.

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