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19 March, 13:03

Calculate the sale-to-cash conversion period based on the following information:

average inventories = $120,000;

average receivables = $85,000;

average payables = $40,000;

cost of goods sold = $182,500;

and net sales = $325,000.

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  1. 19 March, 14:30
    0
    Cash conversion period = 255.46 days

    Explanation:

    The sale-to-cash conversion period is the average length of time between when payment is made to suppliers for goods purchased and when cash are received form customers in respect of sales. The shorter the better because the period indcates how much working finance a business would need.

    It is calculated as follows

    Cash conversion period = Inventory days + receivable days - Payable days

    Inventory days

    = (Average inventory/cost of goods) * 365

    = (120,000/182,500) * 365

    =240 days

    Receivable days

    =Average receivable/Credit sales * 365

    = (85,000/325,000) * 365 days

    = 95.46 days

    Payable days

    = Average payable days/cost of goods * 365days

    = 40000/182,500 * 365 days

    = 80 days

    Sales to cash conversion period

    = 240 + 95.46 - 80

    = 255.46 days
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