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

A company has days of sales outstanding of 45, days of inventory on hand of 60 and days payables outstanding of 30. Management negotiates longer supplier terms, raising days payables outstanding to 50, while the other measures are unchanged. The cash conversion cycle is most likely to change from:

The cash conversion cycle falls from 75 days to 55 days. It equals receivable days plus inventory days minus payable days, so extending payables from 30 to 50 days shortens the cycle by 20 days.

  1. A75 days to 55 daysCorrect
  2. B75 days to 95 days
  3. C135 days to 115 days

Explanation

Initial cycle = 45 + 60 − 30 = 75 days. New cycle = 45 + 60 − 50 = 55 days. Option C ignores the payables subtraction at the start, and option B adds the payables change instead of subtracting it.

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