3 1 average age of the inventory 2 average collection

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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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This document was uploaded on 01/19/2014.

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