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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

A company's raw material holding period is 40 days, WIP period 20 days, finished goods holding period 30 days, receivables collection period 45 days and payables deferral period 35 days. What are its operating cycle and cash cycle respectively?

The operating cycle is 135 days, the sum of raw material, WIP, finished goods and receivables periods. The cash cycle is 100 days, found by deducting the 35-day payables deferral period from the operating cycle.

  1. A135 days and 100 daysCorrect
  2. B135 days and 135 days
  3. C100 days and 65 days
  4. D135 days and 170 days

Explanation

Operating cycle = 40 + 20 + 30 + 45 = 135 days. Cash cycle = operating cycle - payables period = 135 - 35 = 100 days. Option D adds the payables period instead of subtracting it.

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