1. Introduction to Accounting Preparing for a User’s Perspective Introduction to Accounting Preparing for a User’s Perspective www.canvas.net Free Jan. 2014 www.canvas.net Free Jan. 2014 Compute and understand the Cash Conversion Cycle Available on the Google Play Store with support from By Kevin C. Kimball, CPA Debits and Credits Trainer

2. Cash Conversion Cycle Days cash is sitting in inventory Days cash is sitting in receivables I’m waiting!!! $$$$$ Cash not being used? Pay dividends Pay off debt Expand operations Buy back stock Borrow less Financing costs?

3. Cash Conversion Cycle Management

4. Days Sales in Inventory Days Sales in Receivables Days Payables Outstanding Cash Conversion Cycle Operating cycle Purchase Payment Days Payables OS (Ending Accounts Payable / Cost of Goods Sold) * 365 days aka Cost of Sales aka Cost of Revenues

5. 365 days per year Inventory Turnover Ratio Days Sales in Inventory 365 days per year AR Turnover Ratio Days Sales in Receivables Operating Cycle Expanded operating cycle diagram

6. Days Sales in Inventory Days Sales in Receivables Days Payables Outstanding Cash Conversion Cycle 30 25 (10) 45 30 25 (50) 5 5 Difference = 40 days of extra cash for Company B Inventory Management Credit & collections Payables management

7. Days Sales in Inventory Days Sales in Receivables Days Payables Outstanding Cash Conversion Cycle 43.76* 20.94** (105.74)*** -41.04 Amazon.com for the year ended 12/31/12 * 1) Days sales in inventory: (365 / (Cost of sales $45,971 M / Average inventory $5,511.5 M) = 43.76 Average inventory: (Beginning inventory $4,992 M + Ending inventory $6,031 M) / 2 = $5,511.5 M **2) Days sales in receivables: (365 / (Net product sales $51,733 M / Average AR $2,967.5 M) = 20.94 Average AR: (Beginning receivables $2,571 M + Ending receivables $3,364 M) / 2 = $2,967.5 M **2) Days sales in receivables: (365 / (Net product sales $51,733 M / Average AR $2,967.5 M) = 20.94 Average AR: (Beginning receivables $2,571 M + Ending receivables $3,364 M) / 2 = $2,967.5 M ***3) Days payables outstanding: Ending Accounts Payable $13,318 / Cost of Sales $45,971 M) * 365

8. Days Sales in Inventory Days Sales in Receivables Operating cycle Too short? Days Payables Outstanding Cash Conversion Cycle Cash Conversion Cycle (aka Net operating cycle) Too long? No soup for you!!! Cash only. Benefits > Costs

9. Cash Conversion Cycle Gross Margin $ Gross Margin % Cash Conversion Cycle Gross Margin $ Gross Margin % How do users use the cash conversion cycle to analyze a company's cash management?

10. Can we buy on credit net 30? Company B Company A How about COD or net 5 days? Cash Conversion Cycle 120 Days Payables Outstanding 5

11. Benefits of a short or negative Cash Conversion Cycle Reduce financing costs Expand operations Reduce inventory carrying costs Reduce customer non-payments

12. Days Sales in Inventory Days Sales in Receivables aka NET Operating Cycle Purchase Sell Holding period Collection period Collect Days Payables Outstanding Cash Conversion Cycle LESS: Days Payables OS Payment Operating cycle Cash Conversion Cycle (aka Net operating cycle) Operating cycle

13. Introduction to Accounting Preparing for a User’s Perspective Introduction to Accounting Preparing for a User’s Perspective www.canvas.net Free Jan. 2014 www.canvas.net Free Jan. 2014 Compute and understand the Cash Conversion Cycle Available on the Google Play Store with support from By Kevin C. Kimball, CPA Debits and Credits Trainer