Question

During the past month a firm has shown the following metrics:

Compute the cash-to-cash cycle time. Round to two decimal places in all of your calculations.

Short answer

The cash to cash cycle is the length of time among which a company pays money to its vendors for stock and when it collects revenue from its clients.

Step-by-step solution

The cash-to-cash cycle time

The cash-to-cash cycle time (also referred to as the cash conversion cycle as well as the order-to-pay cycle) is the number of days that pass between (1) purchasing materials/inventory from a local supplier as well as (2) collecting money for the sale of the finished material (s). Because a company's working capital has no worth if it is locked up in stock, cash-to-cash cycle time is a key metric for accounting.

Explanation

$$\begin{gathered} \text{Accounts payable days}=\frac{\text{Current value of accounts payable}}{\text{Average daily cost of sales}} \\ \text{=}\frac{\text{200,000}}{35,000} \\ \text{= 5.714 days} \end{gathered}$$

$$\begin{gathered} \text{Inventory days}=\frac{\text{Current total value of inventory}}{\text{Average daily cost of sales}} \\ \text{=}\frac{\text{300,000}}{35,000} \\ \text{= 8.571 days} \end{gathered}$$

The cash to cash cycle (cash conversion cycle) is a simple statistic for calculating how long money is held in the three major cash producing as well as cash consuming places: collections, accounts payable, as well as inventories.

localid="1650962627091" $$\begin{gathered} \text{The Cash to Cash Cycle = Receivable Days + Inventory Days}-\text{Payable Days} \\ \text{Cash to cash cycle time = 7 + 8.571 - 5.714 days} \\ \text{= 9.857 days} \\ \text{=}\left(\text{9.86 days rounded to 2 decimal places}\right) \end{gathered}$$