CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A manufacturer reports days of inventory on hand of 60, days of sales outstanding of 45 and number of days of payables of 35. The company's cash conversion cycle is closest to:
The cash conversion cycle is about 70 days. It equals days of inventory on hand plus days of sales outstanding minus days of payables: 60 + 45 - 35. Payables days are subtracted because supplier credit finances part of the operating cycle.
- A40 days
- B70 daysCorrect
- C140 days
Explanation
Cash conversion cycle = DIO + DSO - DPO = 60 + 45 - 35 = 70 days. The 140-day option adds payables instead of subtracting them, and 40 days omits inventory days incorrectly by using DSO - DPO + something other than DIO.
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