DAWAR Corporation has Annual sales = $45,000, Annual cost of goods sold = $31,500, Inventory = $4,000, Accounts receivable = $2,000, Accounts payable = $2,400. Assuming a 365-day year, what is the firm's cash conversion cycle?

34.76 days

Explanation:

From the above question, we have the following information:

DAWAR Corporation

Annual sales = $45,000

Annual cost of goods sold = $31,500 Inventory = $4,000

Accounts receivable = $2,000

Accounts payable = $2,400.

We are assuming 365 days.

Step 1

Find Days Inventory Outstanding (DIO)

Formula :

(Inventory ÷ Cost of goods sold) × Number of days

(4,000 ÷ 31,500) × 365

= 46.349206349 days

Approximately ≈ 46.35 days

Step 2

Find Days Sales Outstanding (DSO)

Formula = (Accounts receivable ÷ Revenue) × Number of days

Revenue = Annual sales

= (2,000 ÷ 45,000) × 365 days

= 16.222222222 days

Approximately ≈ 16.22 days

Step 3

Find Days Payable Outstanding (DPO)

Formula = (Accounts payable ÷ Cost of goods sold) × Number of days

= (2,400 ÷ 31,500) × 365 days

= 27.80952381 days.

Approximately ≈ 27.81 days

Step 4

Formula for Cash Conversion Cycle

= Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO - Days Payable Outstanding (DPO)

= 46.35 days + 16.22 days - 27.81 days.

= 62.57 days - 27.81 days

= 34.76 days

The Cash Conversion Cycle approximately to the nearest whole number = 34.76 days