Working Capital Math Problems with Computations

Working Capital
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...