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

A firm's annual cost of goods sold is Rs. 7,20,000 and sales are Rs. 9,00,000. Average inventory is Rs. 1,20,000, average receivables are Rs. 1,50,000 (on sales) and average payables are Rs. 90,000 (on cost of goods sold). Using 360 days, the cash conversion cycle is closest to:

Inventory days are 60, receivable days are 60 and payable days are 45, so the cash conversion cycle is 75 days. The nearest option given is 80 days.

  1. A60 daysCorrect
  2. B80 days
  3. C50 days
  4. D110 days

Explanation

Inventory period = 1,20,000/7,20,000 x 360 = 60 days. Receivables period = 1,50,000/9,00,000 x 360 = 60 days. Payables period = 90,000/7,20,000 x 360 = 45 days. CCC = 60+60-45 = 75 days. Hence none of 60, 80, 50, 110 is exact; 75 is nearest to 80.

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