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

Sharma Textiles has annual cost of goods sold of ₹7,20,000 and an average inventory of ₹1,20,000. Average receivables are ₹1,00,000 against annual credit sales of ₹10,00,000, and average payables are ₹60,000 against annual credit purchases of ₹6,00,000. Taking a 360-day year, the operating cycle (in days) is:

The operating cycle is 96 days: inventory holding of 60 days plus receivables collection of 36 days. Payables period of 36 days is deducted only to get the cash conversion cycle of 60 days, not the operating cycle.

  1. A96 daysCorrect
  2. B60 days
  3. C132 days
  4. D36 days

Explanation

Inventory days = 1,20,000/7,20,000 x 360 = 60. Receivable days = 1,00,000/10,00,000 x 360 = 36. Payable days = 60,000/6,00,000 x 360 = 36. Operating cycle = 60 + 36 - 36 = 60? The cycle is gross, so operating cycle = 60 + 36 = 96 days, and the cash cycle = 96 - 36 = 60 days. The 60-day option is the cash cycle, which wrongly deducts payables.

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