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

Rohini Textiles has the following average periods: raw material stored 30 days, work-in-progress 15 days, finished goods stored 20 days, credit allowed to customers 45 days, and credit received from suppliers 35 days. What is its net operating cycle period?

The net operating cycle is 75 days. Add raw material, work-in-progress, finished goods and receivables periods to get a gross cycle of 110 days, then deduct the 35 days of credit received from suppliers. Ignoring creditors gives 110 days, which overstates the cycle.

  1. A110 days
  2. B145 days
  3. C75 daysCorrect
  4. D40 days

Explanation

Gross operating cycle = 30 + 15 + 20 + 45 = 110 days. Net operating cycle = gross cycle minus creditors period = 110 - 35 = 75 days. The figure of 110 days ignores supplier credit, and 145 days wrongly adds the creditors period.

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