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Unformatted text preview: we can see
that the cash conversion cycle has three main components, as shown in Equation
14.3: (1) average age of the inventory, (2) average collection period, and (3) average payment period.
CCC AAI ACP APP (14.3) Clearly, if a firm changes any of these time periods, it changes the amount of
resources tied up in the day-to-day operation of the firm.
EXAMPLE MAX Company, a producer of paper dinnerware, has annual sales of $10 million, a cost of goods sold of 75% of sales, and purchases that are 65% of cost of
goods sold. MAX has an average age of inventory (AAI) of 60 days, an average
collection period (ACP) of 40 days, and an average payment period (APP) of 35
days. Thus the cash conversion cycle for MAX is 65 days (60 40 35). Figure
14.1 presents MAX Company’s cash conversion cycle as a time line. 3. The conceptual model that is used in this section to demonstrate basic short-term financial management strategies
was developed by Lawrence J. Gitman in “Estimating Corporate Liquidity Requirements: A Simplified App...
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