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

Kaveri Foods Ltd. has annual cost of goods sold of Rs. 7,20,000, average inventory of Rs. 1,00,000 and average trade payables of Rs. 60,000 (purchases are Rs. 7,20,000 a year). Annual credit sales are Rs. 9,00,000 with average receivables of Rs. 1,50,000. Taking a 360-day year, compute the cash conversion cycle (inventory days on COGS, debtor days on sales, creditor days on purchases).

The cash conversion cycle is 80 days. Inventory days are 50, debtor days are 60 and creditor days are 30. Adding inventory and debtor days gives an operating cycle of 110 days, and deducting the 30 days of creditor credit leaves 80 days.

  1. A30 daysCorrect
  2. B50 days
  3. C80 days
  4. D20 days

Explanation

Inventory days = 1,00,000/7,20,000 x 360 = 50. Debtor days = 1,50,000/9,00,000 x 360 = 60. Creditor days = 60,000/7,20,000 x 360 = 30. CCC = 50 + 60 - 30 = 80 days. Hence the key is 80 days; 30 days results from using creditors days alone.

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