The text identifies three principal components that jointly comprise the cash conversion cycle . The cash conversion

Question:

The text identifies three principal components that jointly comprise the cash conversion cycle. The cash conversion cycle is defined as the average length of time a dollar is tied up in current assets, and it is determined by the interaction between the inventory conversion period, receivables collection period, and the payables deferral period. Ideally, a company wants to minimize the cash conversion cycle as much as possible. In some circumstances, a firm has a comparative advantage in working capital management because of the nature of its business. This cyber problem looks at two competing booksellers. Barnes and Noble Inc. is a hybrid between the traditional brick and mortar retailer and the Internet retailer. However, approximately 85 percent of its revenues are generated in the traditional retail setting, which will lead us to consider it a traditional retail firm. Amazon.com, on the other hand, represents the new wave of Internet retailing. The success of Amazon.com has spawned the flood of specialty retailing into the Internet marketplace. We will look at the cash conversion cycles of these companies and their implications.

For this cyberproblem, you will be accessing information from the web sites for Barnes and Noble Inc. and Amazon.com at www.shareholder.com/bks and www.amazon.com, respectively.
a. Go to Barnes and Noble's web site, and click on "Annuals." Now that you are in the annual report gallery, click on "1999 Annual Report. (HTML version)" to view the 1999 annual report. Click on "1999 Financial Review" and then click on "Consolidated statements of Operations." From the income statement, write down the annual sales and cost of goods sold for 1999. Assuming a 365-day year, what are the average daily sales and purchases for Barnes and Noble Inc.?
b. Go back one screen and click on "Consolidated Balance Sheets." Write down the 1999 balances shown for the firm's inventories, accounts receivable, and accounts payable. Using this information plus that from part a, calculate its inventory conversion period, receivables collection period, and payables deferral period.
c. What is Barnes and Noble's cash conversion cycle?
d. Now, access Amazon's web site. Scroll to the bottom of the page, and click on "About Amazon.com." Next, click on "Investor Relations," and then click on "Annual Reports & Financial Documents." Click on 1999 Annual Report on Form 10-K, and scroll down until you see Amazon's Consolidated Statement of Operations. Find the annual sales and cost of goods sold. Again, assuming a 365- day year, calculate the average daily sales and purchases for Amazon.
e. Scroll up a page until you see Amazon's Consolidated Balance Sheets. Record 1999 balances for inventories, accounts receivable, and accounts payable. Use this information to calculate Amazon's inventory conversion period, receivables collection period, and payables deferral period.
f. Calculate Amazon's cash conversion cycle.
g. Compare the cash conversion cycles of Barnes and Noble and Amazon. What factors are responsible for these differences? Are these differences firm specific, or are they consequences of the nature of the businesses in which these firms operate?
h. Interpret your results. Explain in words what the cash conversion cycles you calculated mean for these companies.

Cash Conversion Cycle
Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers,...