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Ratio Analysis
Analysis of Cash Cycle

   General Explanation

This analysis of the cash cycle measures the number of days needed from the purchase of an item of inventory to the eventual collection of cash from the accounts receivable upon sale. An analysis of these ratios provides insight into the cash flow components.

  Cash Cycle  
  Number of days to sell inventory he product of this ratio presents the number of days required to sell the company's ending inventory. The effects of purchasing policies and changes in sales become evident from a historical comparison.
Daily sales This ratio presents the annual dollar sales of the Company divided by 365 days.
Days sales in accounts receivable The result of this ratio is the number of days it takes to collect an average invoice. The result can be affected by seasonal fluctuations in sales.
Daily purchases This ratio presents the annual dollar purchases of the Company divided by 365 days.
Days purchases in accounts payable Changes in the number of days that it takes to pay for merchandise purchases may present indications of short-term liquidity problems or the inability to take advantage of purchase discounts.
Days in Cash Cycle This ratio reflects the entire cash cycle from the initial purchase of inventory to the sale of the merchandise and its collection in cash. The number of days in accounts payable reduces the cash cycle and is reflected in the formula as a reduction of the sum of inventory days and receivable days.
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