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# Van Den Borsh Corp Essay

1288 words - 6 pages

Problems – Chapter 16
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 = \$600,000
Annual cost of goods sold = \$360,000
Average accounts receivable = \$160,000
Average accounts payable = \$25,000

Cash Conversion Cycle:

Inventory conversion period (ICP) = Average inventory / Cost of goods sold per day
...view middle of the document...

What will be the net change in the cash conversion cycle, assuming a 365-day year?
Input data:

Annual sales = \$50,735,000
Average inventory = \$15,012,000
Average accounts receivable = \$10,008,000
Cost of goods sold = 85% of \$50,735,000
= \$43,124,750
Average accounts payable = (43,124,750/365) * 30
= \$3,544,500

Cash Conversion Cycle:

Inventory conversion period (ICP) = Average inventory / Cost of goods sold per day
= 15,012,000 / (43,124,750/365)
= 127.06 days
Receivable conversion period (RCP) = Average accounts receivable / Sales per day
= 10,008,000 / (50,735,000/365)
= 72 days
Payables deferral period (PDP) = Average accounts payable / Cost of goods sold per day
= 3,544,500 / (43,124,750/365)
= 30 days
Cash Conversion Cycle (CCC) = ICP + RCP – PDP
= 127.06 + 72 – 30 days
= 169.06 days

New input data:

Annual sales = \$50,735,000
Average inventory = \$15,012,000 - 1,946,000
= \$13,066,000
Average accounts receivable = \$10,008,000 - 1,946,000
= \$8,062,000
Cost of goods sold = 85% of \$50,735,000
= \$43,124,750
Average accounts payable = (43,124,750/365) * 40
= \$4,726,000

New Cash Conversion Cycle:

Inventory conversion period (ICP) = Average inventory / Cost of goods sold per day
= 13,066,000 / (43,124,750/365)
= 110.59 days
Receivable conversion period (RCP) = Average accounts receivable / Sales per day
= 8,062,000 / (50,735,000/365)
= 58 days
Payables deferral period (PDP) = Average accounts payable / Cost of goods sold per day
= 4,726,000 / (43,124,750/365)
= 40 days
Cash Conversion Cycle (CCC) = ICP + RCP – PDP
= 110.59 + 58 – 40 days
= 128.59 days

Net change in cash conversion cycle = 128.59 – 169.06 days
= - 40.47 days
i.e. reduction of 40.47 days.

3. Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it...

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