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

Shreeji Foods Ltd keeps raw material stock for 30 days, takes 15 days in work-in-process, holds finished goods for 20 days and allows customers 40 days of credit. It gets 25 days of credit from its suppliers. Its cash conversion cycle (net operating cycle) is:

The cash conversion cycle is 80 days. Add raw material, work-in-process, finished goods and debtors periods to get the 105-day gross operating cycle, then deduct the 25 days of credit received from suppliers. Ignoring creditors would wrongly give 105 days.

  1. A80 daysCorrect
  2. B105 days
  3. C130 days
  4. D40 days

Explanation

Gross operating cycle = 30 + 15 + 20 + 40 = 105 days. Cash cycle = 105 - 25 (creditors' period) = 80 days. The 105-day option ignores supplier credit. The 130-day option adds creditors' period instead of deducting it. The 40-day option omits the debtors' period (65 - 25).

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