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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Kaveri Industries (360-day year) reports: average raw material stock ₹1,20,000 against annual consumption ₹7,20,000; average work-in-progress ₹60,000 against annual cost of production ₹12,00,000; average finished goods ₹1,00,000 against annual cost of goods sold ₹12,00,000; average debtors ₹2,00,000 against annual credit sales ₹16,00,000; average creditors ₹90,000 against annual credit purchases ₹9,00,000. Its cash operating cycle is:

The cash operating cycle is 117 days. Raw material 60, work-in-progress 18, finished goods 30 and debtors 45 days total 153 days. Deducting the creditors period of 36 days gives 117. Using cost instead of sales for debtors, or ignoring creditors, gives wrong figures.

  1. A117 daysCorrect
  2. B153 days
  3. C132 days
  4. D189 days

Explanation

Raw material days = 1,20,000/7,20,000 × 360 = 60. WIP days = 60,000/12,00,000 × 360 = 18. Finished goods days = 1,00,000/12,00,000 × 360 = 30. Debtors days = 2,00,000/16,00,000 × 360 = 45 (on sales). Creditors days = 90,000/9,00,000 × 360 = 36. Cash cycle = 60 + 18 + 30 + 45 - 36 = 117 days. 153 ignores creditors, and 132 wrongly values debtors against cost.

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