CS Executive · Corporate Accounting and Financial Management · Working Capital Management
In estimating the working capital requirement of a manufacturing firm using the operating cycle approach, which of the following items is NOT included when computing the length of the operating cycle?
The credit period of a term-loan lender is not included in the operating cycle. The cycle covers raw material, work-in-progress, finished goods and debtors periods, less trade creditors' period. Term loans are long-term finance, unrelated to the working capital cycle of day-to-day operations.
- ARaw material storage period
- BWork-in-progress period
- CDebtors collection period
- DPeriod of credit allowed by the company's term-loan lenderCorrect
Explanation
The operating cycle consists of raw material holding, work-in-progress, finished goods holding and debtors collection periods, less the credit period obtained from suppliers. Credit on a term loan is long-term finance and has no bearing on the cycle. Trade creditors' period is the only credit period deducted.
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