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Calculating The Cash Conversion Cycle Additional April 19 2024

The document discusses calculating the cash conversion cycle which is the time between a company spending cash on raw materials and collecting cash from customers. It includes the formulas and calculations for inventory turnover ratio, accounts receivable turnover, average collection period, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle.

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Alkhair Sangcopan
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36 views2 pages

Calculating The Cash Conversion Cycle Additional April 19 2024

The document discusses calculating the cash conversion cycle which is the time between a company spending cash on raw materials and collecting cash from customers. It includes the formulas and calculations for inventory turnover ratio, accounts receivable turnover, average collection period, accounts payable turnover, average payment period, operating cycle, and cash conversion cycle.

Uploaded by

Alkhair Sangcopan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Calculating the Cash Conversion Cycle (From the lecture working capital where the net

working capital is defined as total current assets minus total current liabilities)

Components of the CCC:

 Revenue or Sales and cost of goods sold (COGS) from the income statement.
 Inventory at the beginning and end of the period
 Accounts receivable (AR) at the beginning and end of the period.
 Accounts payable (AP) at the beginning and end of the period.

Example 1: Use the Balance Sheet info to compute and fill in the table
Current Assets: Current Liabilities
Cash and Cash Equivalents P1,200 Accounts Payable P 650
Inventories 700 Short-term debt 6,600
Accounts Receivable 2,200 Total Current Liabilities 7,250
Total Current Assets 4,100
Non-current assets: Non-current liabilities:
Property, Plant, & Equipment 12,000 Long-term debts
5, 500
Other non-current assets 2,500 Total Liabilities
12,750
Total Non-current assets 14, 500
Total Assets 18,600 Owner’s Equity:
Common Stock 3, 500
Retained Earnings 2,350
Total OE
5,850
Total Assets 18,600 Total Liabilities & Owner’s Equity
18,600
Accounting Equation = Assets = Liabilities + Owner’s Equity
Additional Information:
Cost of Goods Sold P 20,000
Credit Sales 120,000
Inventory days 90 days
Solve: Formula Calculation Answer Remarks
Inventory Cost of Goods 20,000/ 700 28.5 A higher ratio tends
Turnover Ratio Sold (COGS) / to point strong sales
Inventory
Accounts Sales/ Accounts 120,000/2,200 54.54 A higher ratio means
receivable Receivable the collection of AR
turnover (ART) is frequent and
efficient
Average 365 days in a year/ 365 / 54. 54 7 days The amount of time it
Collection ART takes to receive
Period (ACP) – payments from clients
is in days
Accounts Cost of Goods 20,000 / 650 30.77 A high ratio indicates
Payable Sold/Accounts prompt payment is
Turnover (APT) Payable being made to
suppliers for purchase
Average 365 days in a year/ 365 / 30.77 11.86 days It shows the average
Payment Period APT no. of days it takes
(APP) – is in for a business to pay
days its vendors
Operating Cycle Inventory Days + 90 days + 7 days 97 days How long it takes a
(OC) – is in days Average Collection company to turn its
Period inventories into cash
Cash Conversion Operating Cycle – 97 days – 11.86 85 days How many days it
Cycle – is in days Average Payment take a company to
Period convert the cash it
spends on inventory
back into cash by
selling its product

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