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 operating cycle is closest to:
The operating cycle is 105 days. It is the sum of days of inventory on hand (60) and days of sales outstanding (45). Payables days are excluded because they enter only the cash conversion cycle, which would be 70 days.
- A70 days
- B105 daysCorrect
- C140 days
Explanation
Operating cycle = days of inventory on hand + days of sales outstanding = 60 + 45 = 105 days. The 70-day figure is wrong because it also subtracts payables, which gives the cash conversion cycle (105 - 35 = 70). The 140-day figure wrongly adds payables days.
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