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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Arjun Traders has average daily cash outflows of Rs 50,000. Inventory conversion period is 60 days, receivable collection period is 40 days and payable deferral period is 30 days. The company's cash conversion cycle, the number of times cash turns over in a year of 360 days, and the minimum operating cash needed are respectively:

The cash conversion cycle is 70 days, cash turnover is about 5.14 times, and minimum operating cash is Rs 35,00,000. The cycle is inventory plus receivable days less payable days, and cash needed is daily outflow multiplied by the cycle length.

  1. A70 days; 5.14 times; Rs 35,00,000Correct
  2. B70 days; 5.14 times; Rs 17,50,000
  3. C130 days; 2.77 times; Rs 65,00,000
  4. D100 days; 3.6 times; Rs 50,00,000

Explanation

Operating cycle = 60 + 40 = 100 days; cash cycle = 100 - 30 = 70 days. Turnover = 360/70 = 5.14 times. Minimum cash = 50,000 x 70 = Rs 35,00,000. Check: annual outflow 1,80,00,000 / 5.14 = about Rs 35,00,000. Option with 17,50,000 wrongly uses 35 days.

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