& B Global's annual credit sales are $18 million; the accounts receivable balance is $1.5 million; the cost of goods sold is $12.6 million; the inventory balance is $350,000, and the balance in accounts payable is $700,000
a. Compute A&B's operating cycle.
b. Compute A&B's cash conversion cycle.
Answer: Average collection period = $1,500,00/($18,000,000/365) = 30.42 days. Inventory conversion period = $350,000/($12,600,000/365) = 10.14 days. The accounts payable deferral period is 365/($12,600,000/$700,000 ) = 20.28 days.
a. Operating cycle = 30.42 + 10.14 = 40.56 days.
b. Cash conversion cycle = 40.56 - 20.28 = 20.28 days.
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