CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
Ganga Traders has an average raw material holding period of 40 days, a work-in-progress period of 10 days, a finished goods holding period of 30 days and a debtors collection period of 45 days. Its creditors payment period is 35 days. What is the length of its operating cycle and cash cycle respectively?
The operating cycle is 125 days, being 40 + 10 + 30 + 45 for stock stages and debtors. The cash cycle is 90 days because the 35-day credit period allowed by suppliers is deducted from the operating cycle.
- A125 days and 90 daysCorrect
- B125 days and 160 days
- C80 days and 45 days
- D125 days and 125 days
Explanation
Operating cycle = 40 + 10 + 30 + 45 = 125 days. Cash cycle = operating cycle minus creditors period = 125 - 35 = 90 days. Adding the creditors period instead (160) is wrong because credit received reduces the cash cycle.
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