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

Sharma Textiles has raw material storage period 30 days, WIP conversion period 10 days, finished goods storage period 20 days, receivables collection period 40 days and payables deferral period 25 days. What is its operating cycle and cash cycle (in days)?

The operating cycle is 100 days, being the sum of raw material, WIP, finished goods and receivables periods (30+10+20+40). The cash cycle is 75 days, found by deducting the 25-day payables deferral period from the operating cycle.

  1. AOperating cycle 100 days; cash cycle 75 daysCorrect
  2. BOperating cycle 75 days; cash cycle 100 days
  3. COperating cycle 125 days; cash cycle 100 days
  4. DOperating cycle 100 days; cash cycle 125 days

Explanation

Operating cycle = 30 + 10 + 20 + 40 = 100 days. Cash cycle = operating cycle less payables deferral period = 100 - 25 = 75 days. Adding the payables period (125) instead of deducting it is the key error in the other options.

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