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

A manufacturing company holds raw materials for 30 days on average, takes 15 days in work-in-progress, keeps finished goods for 20 days, allows debtors 40 days of credit and receives 25 days of credit from suppliers. What is its cash conversion (net operating) cycle?

The cash conversion cycle is 80 days. Add raw material, work-in-progress, finished goods and debtors periods to get 105 days, then deduct the 25 days of supplier credit. Ignoring creditors gives 105, and adding them gives 130, both wrong.

  1. A80 daysCorrect
  2. B105 days
  3. C130 days
  4. D40 days

Explanation

Operating cycle = 30 + 15 + 20 + 40 = 105 days. Cash cycle = operating cycle minus creditors period = 105 - 25 = 80 days. Choosing 105 ignores supplier credit, and 130 wrongly adds the creditors period.

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