Cash Conversion Quiz

QUESTIONS

1. You can be consistently profitable and still have short-term cash problems...

        A) True

        B) False

 

2. The accounts receivable turnover ratio is calculated as...

        A) Net Credit Sales ÷ Average Accounts Receivable  

        B) Net Cash Sales ÷ Average Accounts Receivable

 

3. The days sales in accounts receivable number is calculated as...

        A) 365 ÷ Accounts Receivable Turnover Ratio 

        B) Accounts Receivable Turnover Ratio ÷ 365

 

4. The inventory turnover ratio is calculated as...

        A) Net Credit Sales ÷ Average Inventory

        B) Cost of Goods Sold ÷ Average Inventory

 

5. To find the average inventory on the year one needs...

        A) The starting and ending balances

        B) The starting, middle, and ending balances

 

6. The accounts payable turnover ratio is calculated as...

        A) Net Credit Sales ÷ Average Accounts Payable

        B) Cost of Goods Sold ÷ Average Inventory


7. The cash conversion cycle is calculated as...

        A) Days Sales in AR + Days Sales in AP + Days Sales in Inventory

        B) Days Sales in AR - Days Sales in AP + Days Sales in Inventory

 

8. One would prefer his or her accounts receivable turnover ratio to be...

        A) Higher

        B) Lower

 

9. One would prefer his or her inventory turnover ratio to be...

        A) Higher

        B) Lower

 

10. One would prefer his or her accounts payable turnover ratio to be...

        A) Higher

        B) Lower

 

ANSWER KEY:

1A, 2A, 3A, 4B, 5A, 6B, 7B, 8A, 9A, 10B

 

PRACTICE PROBLEMS

 

A company has the following balances:

Beginning Inventory $100,000; Ending Inventory $200,000; Net Credit Sales $1,200,000; Cost of Goods Sold $850,000; Beginning Accounts Receivable $98,000; Ending Accounts Receivable $144,000; Beginning Accounts Payable $66,000; Ending Accounts Payable $88,000 

 

1. What is the company's gross profit?

2. What is the company's average inventory?

3. What is the company's average accounts receivable?

4. What is the company's average accounts payable?

5. What is the company's accounts receivable turnover ratio?

6. What is the company's inventory turnover ratio?

7. What is the company's accounts payable turnover ratio?

8. What is the company's days sales in accounts receivable?

9. What is the company's days sales in inventory?

10. What is the company's days sales in accounts payable?

11. How long is the company's cash conversion cycle? 

  

ANSWER KEY:

1: $1,200,000 - $850,000 = 350,000

2. ($100,000 + $200,000) ÷ 2 = $150,000

3. ($98,000 + $144,000) ÷ 2 = $121,000

4. ($66,000 + $88,000) ÷ 2 = $77,000

5. $1,200,000 ÷ $150,000 = 8.00

6. $850,000 ÷ $121,000 = 7.02

7. $850,000 ÷ $77,000 = 11.04 

8. 365 ÷ 8.00 = 45.63 days

9. 365 ÷ 7.02 = 51.99 days

10. 365 ÷ 11.04 = 33.06 days

11. 45.63 days + 51.99 days - 33.06 days = 64.56 days