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 |