The Garcia Industries balance sheet and income statement for the year ended 2006 are as follows:?

Question

Balance Sheet (in Millions of Dollars)

Assets Liabilities and Stockholders’ Equity .

Cash $6.0 Accounts payable $10.0

Accounts receivable 14.0 Salaries, benefits, & payroll taxes payable 2.0

Inventories* 12.0 Other current liabilities 10.0

Fixed assets, net 40.0 Long-term debt 12.0

$72.0 Stockholders’ equity 38.0

$72.0

*The average inventory over the pas 2years also equals $12.0 million .

Income Statement (in Millions of Dollars)

Net Sales $100.0

Cost of Sales 60.0

Selling, general, and administrative expenses 20.0

Other expenses 15.0

Net income $ 5.0

A. Determine the length of the inventory conversion period.

B. Determine the length of the receivables conversion period.

C. Determine the length of the operating cycle.

D. Determine the length of the payables deferral period.

E. Determine the length of the cash conversion cycle.

F. What is the meaning of the number you calculated in (e)?

Answer 1

A. Determine the length of the inventory conversion period.

Inventory conversion period = inventory/(cost of sales/360)

= 12/0.16666 = 72 days

B. Determine the length of the receivables conversion period.

Receivables conversion period = receivables/(sales/360)

= 14/0.277777 = 50.4 days

C. Determine the length of the operating cycle.

The operating cycle = inventory conversion period + receivables collection period

= 72 days + 50.4 days = 122.40 days

D. Determine the length of the payables deferral period.

Payables deferral period = (the accounts payable + wages, benefits, and payroll taxes payable) / ([the cost of sales + selling, general, and administrative expenses]/360).

= (10m + 2m)/([60m +20m]/360) = 12/0.22222 = 54 days

E. Determine the length of the cash conversion cycle.

The cash conversion cycle = inventory conversion period, plus the receivables collection period, minus the payables deferral period

= 72 days + 50.4 days – 54 days = 68.4 days

F. What is the meaning of the number you calculated in (e)?

The cash conversion cycle is the length of time between the payment of accounts payable and the receipt of cash from accounts receivable. It is important to working capital management because a firm may choose to finance its raw materials and inventories through trade credit.

Answer 2

G. do your own homework