Working Capital Math Problems with Computations
Complete math problems show work.
Working Capital Exercise (Show your work)
1. Houston Corporation has an inventory conversion period of 60 days (DII), a receivables collection period of 36 days (DSO), and a payable deferral period of 24 days (DPO)
a. What is the length of the company’s cash conversion cycle? (6 pts)
b. If Houston’s annual sales are $3,960,000 and all sales are on credit, what is the average balance in accounts receivable? (6 pts)
c. How many times per year does Houston turn over its inventory? (6 pts)
d. What would happen to Houston’s cash conversion cycle if, on average, inventories could be turned over eight times a year? (7 pts)
2. Webber Corporation carries an amount of receivables equal to $80,000, and its annual credit sales equal $2.4 million. What is the receivables collection period (DSO)? (25 pts)
3. Cleary Enterprises owes its suppliers $180,000. The company’s cost of goods sold averages $2.52 million per year. What is Cleary’s payables deferral period (DPO)? (25 pts)
4. Willowman Furniture Company has inventory that equals $48 million. If the inventory turnover for the company is 8, what is the inventory conversion period? (25 pts)
Name Course Instructor Date
Working Capital Exercise (Show your work)
1 Houston Corporation has an inventory conversion period of 60 days (DII), a receivables collection period of 36 days (DSO), and a payable deferral period of 24 days (DPO).
1 What is the length of the company’s cash conversion cycle? (6 pts)
Cash Conversion Cycle = Days Inventory Outstanding+ Days Sales Outstanding (receivables collection period)- Days Payable (payable deferral period)
Cash Conversion Cycle = DII + DSO – DPO 60+36-24= 72 days
2 If Houston’s annual sales are $3,960,000 and all sales are on credit, what is the average balance in accounts receivable? (6 pts)
DSO= Average accounts receivables/ Total credit sales * number of days
36 days= Average accounts receivables/ $3,960,000 * number of days
Average balance in accounts receivable ($3,960,000*36)/ 360 days = $396,000
3 How many times per year does Houston turn over its inventory? (6 pts)
Inventory turnover =Cost of goods sold (COGS) / average inventory OR sales/ average Inventory
Cost of goods sold (COGS)= beginning inventory+ purchases- ending inventory
Inventory conversion period= Average inventory/ COGS * 360
Inventory conversion period 60= (Average inventory/ $3,960,000)*360
Average inventory= ($3,960,000*60)/ 360 = $ 660,000
Inventory turnover =$3,960,000/ $ 660,000= 6 times
4 What would happen to Houston’s cash conversion cycle if, on average, inventories could be turned over eight times a year? (7 pts)
Inventory turnover =Cost of goods sold (C...
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