- 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
True or False? A firm is not considered healthy unless its accounts payable period exceeds its operating cycle.
Correct Answer: False
This would imply a negative cash cycle. How many firms have a negative cash cycle?
User Contributed Comments 7
| User | Comment |
|---|---|
| jpducros | Supermarkets have.... |
| JakeZ | I have |
| moneyguy | Good one, Jake! Student? |
| johntan1979 | Cash cycle means how many days before you get your money back. Negative cash cycle means you get your money back (from customers) even before it went out (to suppliers). There are quite a number of companies out there with negative cash cycles e.g. Amazon, Dell |
| johntan1979 | The lower the cash cycle, the more desirable it is for the company. A negative cash cycle is most desirable, since it shows that the company is using working capital as efficiently as possible, freeing cash for other things. |
| gill15 | Why is this false then? If they are healthy with negative cash flows...... |
| ascruggs92 | ^It is false because, while ideal to have a negative cash cycle, its absence does not necessarily imply a lack of financial health. In other words, an Accounts Payable period that is shorter than the operating cycle is not bad, in fact, it is normal |