CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
Kaveri Textiles holds raw material for 30 days on average, keeps work-in-progress for 15 days, holds finished goods for 20 days, allows debtors 45 days of credit and receives 35 days of credit from its suppliers. Its cash conversion (net operating) cycle is:
The cash conversion cycle is 75 days. The gross operating cycle is 30 + 15 + 20 + 45 = 110 days, and the 35 days of credit taken from suppliers is deducted to give the period for which the firm's own cash is tied up.
- A75 daysCorrect
- B110 days
- C145 days
- D20 days
Explanation
Gross operating cycle = 30 + 15 + 20 + 45 = 110 days. Cash cycle = 110 − 35 days of creditors' credit = 75 days. Option B ignores the credit received from creditors, and option C wrongly adds creditors' period.
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