Asked by Bich Ha Nguyen on Feb 18, 2024
Verified
Describe how to calculate CCC (cash conversion cycle).
Accounts Payable
Money owed by a business to its suppliers.
- Calculating DIO: To calculate the DIO, you need to determine the average number of days it takes for a company to convert its inventory into sales. This can be done by dividing the average inventory by the cost of goods sold (COGS) and multiplying it by 365 (days in a year).
- Calculating DSO: The DSO represents the average number of days it takes for a company to collect payment from its customers. To calculate the DSO, divide the average accounts receivable by the average daily sales and multiply it by 365.
- Understanding the components: The first step in calculating the cash conversion cycle (CCC) is to identify and understand the three main components involved - the days inventory outstanding (DIO), the days sales outstanding (DSO), and the days payable outstanding (DPO).
Verified Answer
SG
Samantha Graham
Feb 18, 2024
Final Answer :
To calculate CCC,you need to include several items from the financial statements: Income statement: revenue and COGS Balance sheet: beginning and ending inventory; beginning and ending accounts receivable; beginning and ending accounts payable Note that for balance sheet items,because they capture a snapshot in time,you want to average over the period of time that you are investigating.So,if you are looking at one year,then you need to look at the ending period for the current year and the same ending period for the previous year. CCC = DSO + DOI − DPO
Learning Objectives
- Calculating DIO: To calculate the DIO, you need to determine the average number of days it takes for a company to convert its inventory into sales. This can be done by dividing the average inventory by the cost of goods sold (COGS) and multiplying it by 365 (days in a year).
- Calculating DSO: The DSO represents the average number of days it takes for a company to collect payment from its customers. To calculate the DSO, divide the average accounts receivable by the average daily sales and multiply it by 365.
- Understanding the components: The first step in calculating the cash conversion cycle (CCC) is to identify and understand the three main components involved - the days inventory outstanding (DIO), the days sales outstanding (DSO), and the days payable outstanding (DPO).