- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 4. Working Capital and Liquidity
- Subject 1. Cash Conversion Cycle
CFA Practice Question
A firm has average inventory of $1,250,000, an inventory period of 58 days, a receivables period of 32 days, and average payables of $810,000. What is its cash cycle?
B. 52 days
C. 58 days
A. 48 days
B. 52 days
C. 58 days
Correct Answer: B
To begin, you must first find the firm's COGS using the inventory and inventory turnover. Did you get $7,866,379? Then you must use this amount to find the accounts payable period. Did you get 37.6 days? Finally, use this number and the operating cycle given to find the cash cycle.
User Contributed Comments 15
| User | Comment |
|---|---|
| chamad | 365/x=58days------x=6.2931(Inventory turn over) cogs/averae inventory=inv turn over----- cogs = inv turn over * invent = 6.2931 * 1250000 = 7866379.31 |
| schidamb | HOw do you calculate Accounts payable period? |
| steved333 | 52.416 365/58= 6.2931 invto= cogs/avg inv 6.2931*1,250,000= cogs= 7,866,379.31 7866379.31/810,000=9.7116=payablesto 365/9.7116=37.58 58+32-37.58= 52.42 |
| johnowens | Payables Turnover = purchases/payables, why are you all using COGS as the numerator? COGS/Inv = 365/58 -> COGS = 6.293*Inv Purchases = COGS-Inv = 6.293*Inv - Inv = 5.293*Inv Payables Turnover = (5.293*1.25m)/810k = 8.16 days of payables = 365/8.16 = 44.685 cycle = 58 + 32 - 45 = 45 |
| jainsuga | Simpler way should be : Accounts Payable will be = (Avg. PayablesAvg. Inventory)* Inventory Period . As both are based on COGS, so, the ratio of Avg. Payables/Avg. Inventory will be same as Accounts Payable/ Inventory Period period. Acocunts Payable: ($810,000/$1,250,000)*58 = 37.58 |
| NavdeepS | John, I agree with your point that Payables turnover should have purchases as num. But I dont understand why are you assuming that Purchases= COGS - Inv. Shouldnt it Purchases=COGS + ( change in inventory) |
| IvanTG | I have calculated it the same way as jainsuga. Much easier... |
| shiva5555 | It is easier to just make it a ratio and you can get it without knowing any formulas. You know they have the same relationship to each other. (58/1,250,000)=(X/810,000) solve for x and that gives you the accounts payable period. Just simple logic no prior knowledge needed. |
| joywind | agree with the idea that Purchase doesn't equal to COGS unless specify that Inventory Beginning = Inventory Ending. |
| joywind | alright... I was wrong according to the notes... |
| johntan1979 | 52.93 without rounding |
| Shaan23 | Cause we're givin average inventory here --- I think its' alright to assume COGS = Purchases. It should be clearer though. |
| houstcarr | can't assume that COGS and purchases are the same thing. that would make the LIFO/FIFO discussion irrelevant |
| khalifa92 | YESSSS i bet there wont be stupid question like this in the exam |
| walterli | Assume total purchase is COGS.... then its ok |