QUESTION 15 Use the following information for Ace Retailers

QUESTION 15 Use the following information for Ace Retailers to answer the question Pnancial radios for the years ended May 31, 2016 2015 Current (times) Quick (times) Cash flow liquidity (times) 1.57 1.27 1.45 ll days 9 45 1.22 1.43 collection Days inventory held 33 days27 days 79 days (35) days 39) days Days payable outstanding Cash conversion cycle Activity Fixed asset turnover Total asset turnover Other information 28.12 times 23.47 times 2.13 times 2.43 times Cash flow from operations (in millions of S S567 S392 Revenues (in millions of S) Which of the following statements is true with regard to Ace Retailers? The company is able to collect cash faster than they are paying their suppliers, which is why their cash conversion cycle is negative. O The negative cash conversion cycle means that Ace Retailers is paying out cash sooner than they collect from their customers. 0 The average collection period and the days inventory held ratios are too high for a retailer. The low average collection period implies that Ace takes too long to collect on accounts receivable.

Solution

Cash Conversion Cycle = DSO + DIO – DPO

DSO is days sales outstanding = Average Accounts Receivable × 365 ÷ Credit Sales
DIO is days inventory outstanding = Average Inventories × 365 ÷ Cost of Goods Sold
DPO is days payables outstanding = Average Accounts Payable × 365 ÷ Cost of Goods Sold

Ace Retailers has negative cash conversion cycle of 35 & 39 days during the two-year period which suggests an exceptionally good working capital management. It means that Ace Retailers could sell and receive cash from its sales even 35 & 39 days before it actually made payments against its production inputs

First option is correct