[aprilynn1980]

I am an online student, going for my Bachelors degree in Human and Social Services. I am in the last week of my finance class, and so far I have surprised myself with good marks. I am not asking for someone to do this problem for me, but I can not figure out where to begin, I need some help, please walk me through this problem and teach me to do it.

7) A firm’s balance sheet and income statement for the year ending December 31, 1978, are as follows:

Balance Sheet ($ million)

Cash $10.0 Accounts payable $15.0 $15.0
Accounts receivable 15.0 Salaries, benefits, & payroll taxes payable 3.0 3.0
Inventories* 12.0 Long-term debt 15.0 15.0
Fixed assets (net) 30.0 Stockholders' equity 34.0 34.0
Total assets $67.0 Total liab. & stock. Equity $67.0 $67.0

Income Statement ($ million)

Net sales (all credit) $125.0 $125.0
Cost of sales $75.0 75.0
Selling, general, & admin. Expenses $30.0 30.0
Other expenses 13.0 13.0
Earnings after tax $7.0 $ 7.0

*Note: Average inventories also equal $12.0 (million).
What’s the length of the firm’s cash conversion cycle?

[morgaine300]

Here's an example:
Foolish Fundamentals: Cash Conversion Cycle

One thing to note is that they're not actually showing where the bottom figure of each thing came from. It's the 3rd line divided by the 2nd line in all cases. (Like top one is inventory divided by COGS per day.)

Also, as a general rule, these are done using averages. The number in the 3rd line (again, inventory for the 1st one) should be the average of the beginning and end of the year. The statements you have are showing the end of '78, which also includes the end of '77. Remember that 12/31/77 is the same as 1/1/78.

Since analysis equations like this can vary, you should check your book for whatever ones they are using, as they may vary from what you see in the link or what I have just told you.

Give that a try and come back with your attempts or any specific questions.

(Oh, and "cost of sales" is the same as "cost of goods sold." There's differences in what companies call stuff too.)