Question

Kiley Corporation had the following data for the most recent year (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
Original Revised
Annual sales: unchanged $110,000 $110,000
Cost of goods sold: unchanged $80,000 $80,000
Average inventory: lowered by $4,000 $20,000 $16,000
Average receivables: lowered by $2,000 $16,000 $14,000
Average payables: increased by $2,000 $10,000 $12,000
Days in year 365 365


a. 49.8
b. 41.2
c. 34.0
d. 37.4
e. 45.3

Answer 1

The cash conversion cycle be lowered in below mentioned days

Explanation:

Days Inventory outstanding = average inventory by Cost of goods sold into 365

Original = 20000 by 80000 into 365 = 91.25 days

Revised = 16000 by 80000 into 365 = 73 days

Days sales outstanding = average receivables by annual sales into 365

Original = 16000 by 110000 into 365 = 53.09 days

Revised = 14000 by 110000 into 365 = 46.45 days

Days payable outstanding = average payable by cost of goods sold into 365

Original = 10000 by 80000 into 365 = 45.62 days

Revised = 12000 by 80000 into 365 = 54.75 days

Cash conversion cycle = days inventory outstanding plus days sales outstanding minus days payable outstanding

Original = 91.25 days plus 53.09 date minus 45.62 days = 98.72 days

Revised = 73 days plus 46.45 days minus 54.75 days = 64.70 days

Net effect = Original minus Revised

= 98.72 minus 64.70 = 34.02 days

So correct answer is option C i.e. 34.0 days