Eagle Sporting Goods has $2.5 million in inventory and $2
million in accounts receivable. Its average daily sales are
$100,000. The firm’s payables ... Accounting MCQs | Accounting MCQs

Eagle Sporting Goods has $2.5 million in inventory and $2
million in accounts receivable. Its average daily sales are
$100,000. The firm’s payables deferral period is 30 days and
average daily cost of sales are $50,000. What is the length of the
firm’s cash conversion period?

100 days. 60 days.50 days.40 days.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(d) The requirement is to calculate the cash conversion
cycle. The cash conversion period is calculated as the Inventory
conversion period + Receivables collection period – Payables
deferral period. Answer (d) is correct because the inventory
conversion period is $2,500,000/$50,000 = 50 days, and the
receivable conversion period is $2,000,000/$100,000 = 20 days.
Therefore, the cash conversion cycle is equal to 50 days + 20 days
– 30 days = 40 days. Answer (a) is incorrect because is
erroneously adds the payable deferral period.