CFA Practice Question

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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?

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
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
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