Skip to content

CFA Level I · CFA Level I Exam · Financial Analysis Techniques

A firm's cash conversion cycle is calculated from the following data: days of inventory on hand 55, days of sales outstanding 38, and number of days of payables 46. The firm negotiates payment terms that raise payables days by 12 and its collection effort cuts receivables days by 5, with inventory unchanged. The new cash conversion cycle is closest to:

The new cash conversion cycle is about 30 days. With receivables days falling to 33 and payables days rising to 58, the cycle is 55 plus 33 minus 58, which equals 30. The original cycle was 47 days, so both changes shorten the cycle.

  1. A30 daysCorrect
  2. B47 days
  3. C64 days

Explanation

Original cycle = 55 + 38 - 46 = 47 days. New receivables days = 33 and payables days = 58. New cycle = 55 + 33 - 58 = 30 days. 47 is the original cycle. 64 results from subtracting the payables change the wrong direction: 55 + 33 - 34 would differ, while 55+38+... mistakes of adding payables give 64 approximately.

Did you get it right without looking?

One question tells you little. A timed set on Financial Analysis Techniques shows your real accuracy, how long you take and where you lose marks.

Practise Financial Analysis TechniquesFree diagnostic mock

More Financial Analysis Techniques questions