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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Bharat Foods Ltd expects annual sales of ₹36,00,000 on credit. Its finance manager is evaluating the liquidity function: raw material is held for 30 days, production takes 20 days, finished goods are held 10 days, and customers pay in 40 days; suppliers give 30 days credit. Using a 360-day year, by how many days must the firm finance its operating cycle with funds other than trade credit (net operating cycle)?

The net operating cycle is 70 days. The gross cycle adds raw material, production, finished goods and receivable periods to 100 days, and deducting the 30 days of supplier credit leaves 70 days that the firm must finance itself.

  1. A70 daysCorrect
  2. B100 days
  3. C60 days
  4. D30 days

Explanation

Gross operating cycle = 30 + 20 + 10 + 40 = 100 days. Net operating cycle = 100 - 30 days of payables credit = 70 days. The 100-day option forgets to deduct creditors' period; the sales figure is not needed for the day count.

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