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What is the purpose of constructing a timeline for a company's operating cycle using the average duration of short-term accounts?
What is the purpose of constructing a timeline for a company's operating cycle using the average duration of short-term accounts?
The purpose is to understand the company's cash conversion cycle, which is the amount of time between paying suppliers and receiving cash from customers.
What are the three components that make up the cash conversion cycle, and how are they defined?
What are the three components that make up the cash conversion cycle, and how are they defined?
The three components are: days payable outstanding (DPO), days of inventory on hand (DOH), and days sales outstanding (DSO). DPO is the amount of time accounts payable are outstanding, DOH is the amount of time inventory is held, and DSO is the amount of time accounts receivable are outstanding.
How is the cash conversion cycle formally expressed in terms of the three components?
How is the cash conversion cycle formally expressed in terms of the three components?
The cash conversion cycle, in days, is expressed as: Cash conversion cycle = Days of inventory on hand + Days sales outstanding - Days payable outstanding.
Why are the activity ratios (DPO, DOH, and DSO) important for analysts to understand?
Why are the activity ratios (DPO, DOH, and DSO) important for analysts to understand?
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How can the cash conversion cycle be used to evaluate a company's financial performance and management of its working capital?
How can the cash conversion cycle be used to evaluate a company's financial performance and management of its working capital?
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