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

Sharma Traders has raw material storage period of 30 days, work-in-progress period of 10 days, finished goods storage period of 20 days, and receivables collection period of 40 days. It gets 25 days of credit from suppliers. What is its operating cycle and cash cycle (in days)?

The operating cycle is 100 days, being the sum of raw material, work-in-progress, finished goods and receivables periods (30+10+20+40). The cash cycle is 75 days after deducting the 25 days of supplier credit 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 minus payables period = 100 - 25 = 75 days. Adding the creditors period instead (125) is the key error, and swapping the two figures is another.

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