Computation of working capital cycle.
The Garcia Industries balance sheet and income statement for the year ended 2006 are as follows:
Balance Sheet (in Millions of Dollars)
|
Assets
|
Liabilities and Stockholder's Equity
|
|
Cash
|
$6.0
|
Accounts Payable
|
$10.0
|
|
Accounts receivable
|
14.0
|
Salaries, benefits, and payroll taxes payable
|
2.0
|
|
Inventories*
|
12.0
|
Other current liabilities
|
10.0
|
|
Fixed Assets, net
|
40.0
|
Long-term debt
|
12.0
|
|
|
|
Stockholders' equity
|
38.0
|
|
|
72.00
|
|
72.00
|
*The average inventory over the past 2 years also equals 12 million.
Income Statement (in Millions of Dollars)
|
Net Sales
|
$100.0
|
|
Cost of Sales
|
60.0
|
|
Selling, general and administrative expenses
|
20.0
|
|
Other expenses
|
15.0
|
|
Net Income
|
5.0
|
a. Determine the length of the inventory conversion period.
b. Determine the length of the receivables conversion period.
c. Determine the length of the operating cycle.
d. Determine the length of the payables deferral period.
e. Determine the length of the cash conversion cycle.
f. What is the meaning of the number you calculated in (e)?