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

A firm has days of sales outstanding of 40, days of inventory on hand of 55 and a cash conversion cycle of 50 days. Annual cost of goods sold is 7,300,000 and the firm uses a 365-day year. Average payables are closest to:

Average payables are about 900,000. Rearranging the cash conversion cycle gives payables days of 55 + 40 - 50 = 45. With daily cost of goods sold of 20,000, payables equal 45 times 20,000, or 900,000.

  1. A450,000
  2. B900,000Correct
  3. C1,000,000

Explanation

CCC = DIO + DSO - DPO, so DPO = 55 + 40 - 50 = 45 days. Daily COGS = 7,300,000/365 = 20,000. Payables = 45 x 20,000 = 900,000. Using 50 days gives 1,000,000, which mistakes the CCC for payables days.

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