Computation of cash conversion cycle from income statement and balance sheet.
The Hopewell Pharmaceutical Company's balance sheet and income statement for last year are as follows:
Balance Sheet (in Millions of Dollars)
Assets Liabilities and Equity
|
Cash and Marketable securities
|
$1,100
|
Accounts Payable
|
$900
|
|
Accounts receivable
|
1,300
|
Accrued liabilities
(Salaries and benefits)
|
300
|
|
Inventories*
|
800
|
Other Current liabilities
|
700
|
|
Other current assets
|
200
|
Total current liabilities
|
$1,900
|
|
Total current assets
|
$3,400
|
Long-term debt and other liabilities
|
1,000
|
|
Plant and equipment (net)
|
2,300
|
Common stock
|
1,800
|
|
Other Assets
|
1,000
|
Retained earnings
|
2,000
|
|
Total Assets
|
$6,700
|
Total Stockholders' equity
|
3,800
|
|
Total liabilities and equity
|
$6,700
|
|
|
*Assume that average inventory over the year was $800 million, that is, the same as ending inventory.
Income Statement (In millions of dollars)
|
Net Sales
|
$6,500
|
|
Cost of sales
|
1,500
|
|
Selling, general, and administrative expenses
|
2,500
|
|
Other expenses
|
800
|
|
Total expenses
|
$4,800
|
|
Earnings before taxes
|
1,700
|
|
Taxes
|
680
|
|
Earnings after taxes (net income)
|
$1,020
|
a. Determine Hopewell's cash conversion cycle.
b. Give an interpretation of the value computed in (a).