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

Mehta Ltd has annual sales of Rs 7,20,000 (360 days), all on credit, and cost of sales of Rs 5,40,000. Average inventory is Rs 90,000, average receivables Rs 1,20,000 (on sales value) and average payables Rs 45,000 (on cost of sales). Using cost of sales for inventory and payables and sales for receivables, what is its cash conversion cycle (days)?

The cash conversion cycle is 90 days. Inventory holding is 60 days, receivables collection is 60 days, and payables deferral is 30 days, so 60 + 60 - 30 equals 90 days.

  1. A60 days
  2. B90 days
  3. C45 days
  4. D75 daysCorrect

Explanation

Inventory days = 90,000/5,40,000 x 360 = 60. Receivable days = 1,20,000/7,20,000 x 360 = 60. Payable days = 45,000/5,40,000 x 360 = 30. Cash cycle = 60 + 60 - 30 = 90 days. Check: option D is 75, so recompute: 60+60-30 = 90, hence the correct option is 90.

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