OC CCC Activity 1 4

ACTIVITY 1
1.
a. Sari - sari store
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b. Shoes Manufacturing Store
3. I was able to compare the operating cycles from the internet and I found out that it was the
same
QUESTIONS:
1. When does this operating cycle start? When does the operating cycle end?
 The operating cycle is the time span that begins when a piece of merchandise is bought
and ends when the company receives the cash from its sale. If an object is delivered on
credit, this is the day the accounts receivable are received.
2. Does the operating cycle vary widely by industry?
 YES, the operating cycles vary widely by industry.
3. Which one is longer/ shorter why?
 Cash conversion cycle is shorter than the operating cycle as the firm does not have to
pay for the items in its inventory for a period equal to the length of the account payable
deferral period.
ACTIVITY 2
EXERCISES
1. (CASH CONVERSION CYCLE). Cee-jay Industries has a inventory conversion period of 60 days, a
receivable conversion period of 35 days and a payments cycle of 28 days. What is the length of the
firm’s cash conversion cycle?
Operating Cycle = Inventory Conversion Period + Receivable Collection Period

= 60 + 35
Operating Cycle = 95 days
Cash Conversion Cycle = Operating Cycle – Accounts Payable Deferral Period

= 95 – 28
Cash Conversion Cycle = 67 days
2. (CASH CONVERSION CYCLE). The Zorro Corp. has an inventory conversion period of 75 days, a
receivables collection period of 38 days and a payables deferral period of 30 days.
a) What is the length of the firm’s cash conversion cycle?
Operating Cycle = Inventory Conversion Period + Receivable Collection Period
= 75 + 38
Cash Conversion Cycle = Operating Cycle – Accounts Payable Deferral Period

= 113 – 30
b) If Zorro’s annual sales are P3,241,875 and all sales are on credit, what is the firm’s investment in
accounts receivable? (use 365 days in a year)
Investment in Accounts Receivable = Annual Credit Sales (Days / 365)

= 3,241,875 (38 / 365)
= 3,241,875 (0.10)
Investment in Accounts Receivable = 324,187.5
c) How many times per year does Zorro turnover its inventory? (use 365 days)
Inventory Conversion Period = 365

ITR
75 = 365
ITR
75 ITR = 365
75 75
ITR = 4.87
ACTIVITY 3
1. List other five (5) remedies that may be adopted to reduce the length of operating cycle or you
may use examples from the previous listed remedies.
a. Speed up the3 sale of inventories. If a company can quickly sell its inventories, the operating
cycle will decrease
b. Reduce the time needed to collect receivables. If a company can quickly collect cash from
sales on credit, the operating cycle will likewise decrease
c. An entity should also be able to find ways to make payment terms longer. Through this way,
the operating cycle will be shortened since the company can delay paying out cash.
d. The purchasing department should always ensure that correct quantity and quality of raw
materials are being purchased. Through this way, an entity can prevent delays from
occurring
e. The entity should also optimize the manufacturing process so that finished goods are always
present and are available to be sold.
2. Answer Exercise Number 3 (round up your answers)
Computer Companies
Gateway Polo Ralph Mc Donald's

Data (In Millions) IBM DELL (GTW) Lauren (RL) (MCD)
Sales 91.424 55.908 3.981 4.295 21.586
Cost of Sales 53.129 45.958 3.725 1.959 14.602
Accounts Payable 18.006 10.657 0.929 0.6 2.739
Accounts Receivable 28.655 5.452 0.522 0.512 0.904
Inventory 2.81 0.576 0.112 0.527 0.149
Required: For each company, compute for the following:
IBM
1. Inventory Conversion Period = 365 ITR = CGS__
ITR Inventory
= 365 = 53.129
18.91 2.81
Inventory Conversion Period = 20 days ITR = 18.91
2. Receivable Collection Period =

A/R______ DCS = Annual Sales
Daily Credit Sales 365
= 28,655,000__ = 91,424,000
250,476.71 365
Receivable Collection Period = 115 days DCS = 250,476.71
3. Payable Deferral Period = 365____
CGS / AP
=_____365____
53.129/18.006
= ____365___
2.95
Payable Deferral Period = 124 days
4. Operating Cycle = ICP + RCP

= 20 + 115
5. Cash Conversion Cycle = OC – PDP

= 135 – 124
DELL
ITR Inventory
= 365 = 45.958
79.79 0.576

= 5,452,000__ = 55,908,000
153,172.60 365

CGS / AP
=_____365____
45.958/10.657
= ____365___
4.31

= 5 + 188

= 193-85
GTW
ITR Inventory
= 365 = 3.725
33.26 0.112
2. Receivable Collection Period = A/R______ DCS = Annual Sales

= 522,000__ = 3,981,000
10,906.85 365

CGS / AP
=_____365____
3.725 / 0.929
= ____365___
4.01

= 11 + 48

= 59 - 92
Cash Conversion Cycle = -33 days
Ralph Lauren
ITR Inventory
= 365 = 1.959
3.72 0.527

= 512,000__ = 4,295,000
11,767.12 365

CGS / AP
=_____365____
1.959 / 0.6
= ____365___
3.27

= 99 + 44

= 143 - 112
McDonald’s
ITR Inventory
= 365 = 14.602
98 0.149
Inventory Conversion Period = 4 days ITR = 98
2. Receivable Collection Period = A/R______ DCS = Annual Sales
=
904,000___ = 21,586,000
59,139.73 365

CGS / AP
=_____365____
14.602 / 2.739
= ____365___
5.33

= 4 + 16

= 20 - 69
Cash Conversion Cycle = -49 days
ACTIVITY 4
Answer the related questions for Exercise Number 3:

a. Which period indicates how effective is the company in its cash management?
o Cash Conversion Cycle indicates how effective the company is in its cash management.
The reason for this is because the cash conversion cycle measures the elapsed time
between the points at which a firm pays for raw materials and at which it receives
payment for inventories sold. By looking at this cycle, we ca determine how effective a
company is in converting purchased inventories into cash and collecting trade receivables
to generate cash.
b. Which period indicates how efficient is the company in its sales?
o Inventory Conversion Period indicates how efficient a company is in its sale. The
reason is because the inventory conversion period measures the number of days it takes
for a company to convert its inventory into sales. It measures the days it take for
inventories to be sold from the day it was purchased.
c. Which period reflects a better credit policy with its sales?
o Receivable Collection Period reflects a better credit policy with its sales. The receivable
collection period measures the number of days it take to convert Accounts Receivable
into cash. This concerns the credit policy of an entity, it will indicate whether the entity has
good credit policy or not.
d. Which period may indicate a poor management of its obligations to pay?
o Payable Deferral Period may indicate poor management of an entity’s obligations to pay.
The payable deferral period concerns the entity’s obligation to pay for raw materials
purchased on credit.
e. Based from the data gathered, McDonalds Company is more effective in its working capital
management than IBM. (TRUE or FALSE?)
o TRUE. McDonalds’s is more effective in its working capital management than IBM. It has
shorter operating cycle which means that the entity can more quickly sell its inventories
and convert it into cash than IBM.
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ACTIVITY 1

Operating Cycle = Inventory Conversion Period + Receivable Collection Period

Cash Conversion Cycle = Operating Cycle – Accounts Payable Deferral Period

Cash Conversion Cycle = Operating Cycle – Accounts Payable Deferral Period

Investment in Accounts Receivable = Annual Credit Sales (Days / 365)

Inventory Conversion Period = 365

2. Answer Exercise Number 3 (round up your answers)

Gateway Polo Ralph Mc Donald's

Required: For each company, compute for the following:

2. Receivable Collection Period =

4. Operating Cycle = ICP + RCP

5. Cash Conversion Cycle = OC – PDP

2. Receivable Collection Period =

3. Payable Deferral Period = 365____

4. Operating Cycle = ICP + RCP

5. Cash Conversion Cycle = OC – PDP

2. Receivable Collection Period = A/R______ DCS = Annual Sales

3. Payable Deferral Period = 365____

4. Operating Cycle = ICP + RCP

5. Cash Conversion Cycle = OC – PDP

2. Receivable Collection Period =

3. Payable Deferral Period = 365____

4. Operating Cycle = ICP + RCP

5. Cash Conversion Cycle = OC – PDP

2. Receivable Collection Period = A/R______ DCS = Annual Sales

3. Payable Deferral Period = 365____

4. Operating Cycle = ICP + RCP

5. Cash Conversion Cycle = OC – PDP

Answer the related questions for Exercise Number 3:

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