Cyberproblem

The Cash Conversion Cycle in Practice - Barnes and Noble, Inc. and Amazon.com

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 cyberproblem 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% of its revenues are generated in the traditional retail setting, which will lead us to consider them 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 investor Web sites for Barnes and Noble, Inc. and Amazon.com, at http://www.barnesandnobleinc.com/financials/ and http://www.amazon.com, respectively.

1. Go to Barnes and Noble's Web site, and click on "Annual Report." Now that you are in the annual report gallery, click on "Selected Consolidated Financial Data". From the firm's income statement, write down the annual sales and cost of goods sold for 2001. Assuming a 365-day year, what are the average daily sales and purchases for Barnes and Noble, Inc.?
   
   
2. Go to the firm's balance sheet. Write down the balances shown for the firm's inventories, accounts receivable, and accounts payable. Using the information from parts a and b, calculate its inventory conversion period, receivables collection period, and payables deferral period.
   
   
3. What is Barnes and Noble's cash conversion cycle?
   
   
4. 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 "Financials." Request a copy of Amazon's 2001 Annual Report on Form 10-K. If you are unfamiliar with using 10-K forms, this annual report will seem quite different from others you have seen. Ultimately, though, it is very much like the traditional annual report. On the income statement, find the annual sales and cost of goods sold. Again, assuming a 365-day year, calculate the average daily sales and purchases for Amazon.
   
   
5. From the balance sheet, record 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.
   
   
6. Calculate Amazon's cash conversion cycle.
   
   
7. 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?
   
   
8. Interpret your results. Explain in words what the cash conversion cycles you calculated mean for these companies.