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

A firm reports annual sales of 3,650 and cost of goods sold of 2,555, all on credit. Average receivables are 300, average inventory is 350, and average payables are 175. Using a 365-day year with average balances, the firm's cash conversion cycle is closest to:

The cash conversion cycle is about 55 days, so the closest option is 50 days. Receivable days are 30, inventory days are 50 and payable days are 25, with inventory and payables based on cost of goods sold. Adding the first two and subtracting payables gives 55.

  1. A30 days
  2. B50 daysCorrect
  3. C65 days

Explanation

Days of receivables = 300/3,650×365 = 30. Days of inventory = 350/2,555×365 = 50. Days of payables = 175/2,555×365 = 25. Cycle = 30 + 50 − 25 = 55, so the closest is 50. Check: dividing payables by sales gives 17.5 days, a wrong base, producing 62.5, near 65.

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