[Anonymous]

The question and accompanied explanation is very long so I decided to take a screenshot and upload it:

https://postimg.org/image/tktttkhzd/

I understand the Cash Conversion Cycle calculation, where you add the Inventory Conversion Period + Receivables Collection – Payables Deferral. The question asks for the average receivables, which I understand I would need to find the average collection period and multiply that by the daily sales.

What I don’t understand is why you have to divide the “average cost of goods sold per day” in inventory conversion and “average purchases per day” for payables deferral.

The formula for inventory conversion period is: 360/(COGS/Avg. Inv) – where does averaging the COGS come into play here? (I have the same question for the payables deferral period using average sales per day). Something about that step just doesn’t click with me, and I’d really appreciate any explanation. Thank you!

[jfreelov]

Another way to think of the Inventory Conversion Period is “How long will my inventory last if I don't buy anything more?” To answer this question, you would need to know how much inventory you actually have (averaged for the sake of generalizing the answer to the whole period) and then figuring out how much you will sell each day (this is the COGS per day) . So if you have $100 in inventory, and you are selling $5 worth every day (on average), you will run out in 20 days (100 / 5).

The averaging for COGS is taking COGS for the whole year and dividing by 360

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

Another way to think of the Inventory Conversion Period is “How long will my inventory last if I don't buy anything more?” To answer this question, you would need to know how much inventory you actually have (averaged for the sake of generalizing the answer to the whole period) and then figuring out how much you will sell each day (this is the COGS per day) . So if you have $100 in inventory, and you are selling $5 worth every day (on average), you will run out in 20 days (100 / 5).

The averaging for COGS is taking COGS for the whole year and dividing by 360

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[Anonymous]

Thank you jfreelov. I think I see what you are saying. If I think of it kind of like a break even point formula it makes more sense to me.

Is there a way I could have figured this out using the 360/Inventory Turnover formula? I have solved many other MCQs successfully by using algebra with this formula but I'm having issues figuring out a proof between the traditional formula and the method required by this problem.

I guess I'll just pray this doesn't appear on my exam!

[Anonymous]

Thank you jfreelov. I think I see what you are saying. If I think of it kind of like a break even point formula it makes more sense to me.

Is there a way I could have figured this out using the 360/Inventory Turnover formula? I have solved many other MCQs successfully by using algebra with this formula but I'm having issues figuring out a proof between the traditional formula and the method required by this problem.

I guess I'll just pray this doesn't appear on my exam!

[jfreelov]

Inventory Conversion = Average Inventory / Average COGS

= Avg Inventory / (COGS / 360)

= Avg Inventory x (360 / COGS)

= 360 x (Avg Inventory / COGS)

= 360 / (COGS / Avg Inventory)

= 360 / Inventory Turnover

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[jfreelov]

Inventory Conversion = Average Inventory / Average COGS

= Avg Inventory / (COGS / 360)

= Avg Inventory x (360 / COGS)

= 360 x (Avg Inventory / COGS)

= 360 / (COGS / Avg Inventory)

= 360 / Inventory Turnover

FAR - 71, 94
BEC - 91
REG - 51, 88
AUD - 89

[Anonymous]

Ahh I was having issues with step 2 and 3 when you flip over the COGS and 360. Thank you so much! I love you, haha!

[Anonymous]

Ahh I was having issues with step 2 and 3 when you flip over the COGS and 360. Thank you so much! I love you, haha!

[Author]

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