CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Web Company has a cash conversion cycle of 90 days. Its inventory turnover reduces from 6 to 5. What is the effect on the cash conversion cycle?
A. Decreases by 12 days
B. Stays the same
C. Increases by 12 days
Explanation: Cash conversion is inventory days plus receivable days less payables days. If inventory turnover reduces from 6 to 5, then inventory days will increase from 61 to 73 and therefore the cash conversion cycle will increase by 12 days.

User Contributed Comments 7

User Comment
skymall22 What am I missing? How did you know that the inventory days started at 61?
tony1973 Average inventory processing period = 365 / inventory turnover
murli Inverse relationship between No. of times ratio and Days ratio!
Shelton CCC=Inv.per + Rcvs.per - Pmt.per
=365/(COGS/Inv)+365/(Sales/Rcvs)-365/(Sales/Pmt)
=>
delta.CCC=365*(new.to^(-1)-old.to^(-1))
=365(5^-1-6^-1)
=12

Would anybody explain in detail about CCC formula?
skath CCC=> Days to convert operating activity to Cash
endurance actually you could choose a very intuitive approach, if you just now the formula:
Cash conversion= Inventory conversion + receivables conversion - payables conversion.

If inventory turnover falls from 6 to 5 (inventory is longer at the company), CC must increase - no calculation is actually neccesary in this question
endurance Actually its quite easy and if you want to be sure at exam, do the calculation.

So, compare 365/6 to 365/5.

365/6 = 61 and 365/5 = 73.

A decrease in inventory turnover increases the CCC by 12 days
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