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CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A company has annual sales of 3,650,000 and cost of goods sold of 2,555,000. Average receivables are 300,000, average inventory is 350,000 and average payables are 210,000. Using a 365-day year and ending-free averages as given, the operating cycle is closest to:

The operating cycle is about 80 days. Receivables of 300,000 against daily sales of 10,000 give 30 days, and inventory of 350,000 against daily cost of goods sold of 7,000 gives 50 days. The operating cycle is the sum, 80 days.

  1. A30 days
  2. B80 days
  3. C110 daysCorrect

Explanation

DSO = 300,000/(3,650,000/365) = 30 days. DIO = 350,000/(2,555,000/365) = 350,000/7,000 = 50 days. Operating cycle = 30 + 50 = 80 days. The 110 days figure wrongly uses sales for inventory turnover? No: it is wrong because it adds payables-free errors; 30 days is only DSO.

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