FIN3702 - Working Capital Management - Selected Study Guide Problems and Solutions

SOLUTIONS TO PROBLEMS QUESTIONS IN THE FIN3702 STUDY GUIDE

Study unit 5: The Cash Conversion Cycle

Question 6

Given facts: Accounts receivable = R2 000 000
AAP = 30 days
Inventory = R5 000 000
Average daily sales = R100 000

CCC = AAI + ACP – APP

Step 1: Determine the average age of inventory (AAI)

Inventory R5 000 000
Average age of inventory = = = 50 days
Daily sales R100 000


Step 2: Determine Accounts receivable period (ACP)

Receivable s R2 000 000
Accounts receivable period = = = 20 days
Daily sales R100 000

Step 3: CCC = AAI + ACP – APP

CCC = 50 days + 20 days – 30 days = 40 days

Question 7

Please note that in the absence of the “cost of goods sold”, the sales value can be used
to approximate the levels of inventory if we assume that all “material” produced is sold
off in sales.

365 days
Average age of inventory (AAI) =
Sales/Inve ntory

Annual sales = R2 000 000 x 12 months = R24 000 000

R2 000 000
Inventory of half of monthly sales = = R1 000 000
2

365 days
Therefore AAI = = 15.2 days
R24 000 000/R1 000 000

, Question 8

CCC = AAI + ACP – APP;

If, ACP = 60 days; APP = 45 days and AAI = 72 days

CCC = 72 days + 60 days – 45 days = 87 days.

Question 9

Calculate each of the respective components of the Cash Conversion Cycle.

As mentioned above, the sales value can be used to calculate the inventory movements
in the absence of the cost of goods sold figure.

Current inventory
Average age of inventory (AAI) =
Daily sales

R120 000
AAI = = 73 days
R600 000/365

Accounts receivable
Average collection period (ACP) =
Daily sales

R157 808
ACP = = 96 days
R600 000/365

Accounts payable
Average payment period (APP) =
Daily purchases

R25 000
APP = = 25 days
R365 000/365

CCC = AAI + ACP – APP

CCC = 73 days + 96 days – 25 days = 144 days.