Respond to each classmate 100 words a piece Classmate 1 The cash conversion cycle focuses on the length and time between when a firm makes cash payments (or invests in) the manufacture, labor, or inv

Respond to each classmate 100 words a piece

Classmate 1

The cash conversion cycle focuses on the length and time between when a firm makes cash payments (or invests in) the manufacture, labor, or inventory and when it receives cash inflows/ realizes a cash return from its investment in production.  There are three components of the cash conversion cycle.  The first component is the inventory conversion period or the age of inventory.  This is the average length of time required to convert raw materials into finished goods and then sell those goods.

The second component of the cash conversion cycle is the receivables collection period or the age of receivables.  (Also known as days sales outstanding). This is the average length of time required to convert the firm’s receivables into cash.  (Simply put, collecting on a sale made on credit).  This is also known as days sales outstanding.  The final component of the cash conversion cycle is the payables deferral period.  This indicates the average length of time between the purchase of raw materials and labor and the payment of cash for this investment.

The cash conversion cycle provides the net of the three different components described and it provides the length of time from when the firm pays for the means of production and when it receives a cash return on this investment.  It is essentially the length of time that a dollar is tied up in current assets.

It is important to manage the cash conversion cycle because a firm’s goal should be to shorten this cycle as much as possible without harming operations. This aids in improving profits, because the longer the cash conversion cycle, the greater the necessity for additional outside financing.

Classmate 2

As stated in the text, the cash conversion cycle focuses on the lengths of time between when the company makes cash payments, or invests in the manufacture of inventory, and when it receives cash inflows, or realizes a cash return from its investment in production. During the cash conversion cycle, there are three other periods used in the model and they are: 1). the inventory conversion period (age of inventory) is the average length of time required to convert raw materials into finished goods and then to sell those goods and the amount of time that the product remains in inventory in various stages of completion, 2). the receivables collection period (age of receivables) is the average length of time required to convert the firm’s receivables into cash or to collect cash following a credit sale, 3). the payables deferral period (age of payables) is the average length of time between the purchase of raw materials and labor and the payment of cash for them. Therefore, the fourth period, the cash conversion cycle computation nets out the three periods, resulting in a value that equals the length of time from when the firm pays for (invests in) productive resources (materials and labor0 and when it receives cash ( a return) from the sale of products. The cash convenience cycle equals the average length of time that a dollar remains tied up (invested) in current assets.