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

A company reports annual credit sales of 7,300,000, cost of goods sold of 5,110,000, average receivables of 800,000, average inventory of 700,000 and average payables of 420,000. Using a 365-day year, the cash conversion cycle is closest to:

The cash conversion cycle is about 60 days. Receivables days are 40, inventory days are 50, and payables days are 30. Adding receivable and inventory days and subtracting payable days gives 40 + 50 - 30 = 60 days.

  1. A20 days
  2. B40 daysCorrect
  3. C60 days

Explanation

DSO = 800,000/7,300,000 x 365 = 40 days. DIO = 700,000/5,110,000 x 365 = 50 days. DPO = 420,000/5,110,000 x 365 = 30 days. CCC = 40 + 50 - 30 = 60 days. Wait: recompute check gives 60, so key is 60.

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