- CFA Exams
- CFA Level I Exam
- Study Session 11. Corporate Finance (2)
- Reading 35. Working Capital Management
- Subject 1. Managing and Measuring Liquidity

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**CFA Practice Question**

The following information is available for a company and the industry in which it competes:

Accounts receivable turnover | 5.6 times | 6.5 times

Inventory turnover | 4.2 times | 4.0 times

Number of days of payables | 28 days | 36 days

Item | Company | Industry

Accounts receivable turnover | 5.6 times | 6.5 times

Inventory turnover | 4.2 times | 4.0 times

Number of days of payables | 28 days | 36 days

Relative to the industry, the company's operating cycle ______

A. is longer, but its cash conversion cycle is shorter.

B. is shorter, but its cash conversion cycle is longer.

C. and cash conversion cycle are both longer.

**Explanation:**Operating cycle = number of days of inventory + number of days of receivables

Cash conversion cycle = operating cycle - number of days of payables

Company

Number of days receivables: 365/5.6 = 65 days; Number of days inventory: 365/4.2 = 87 days; Operating cycle 65 + 87 = 152 longer; Cash conversion cycle: 152-28 = 124 longer

Industry

Number of days receivables: 365/ 6.5= 56 days; Number of days inventory: 365/4.2 = 87 days; Operating cycle: 56 + 91 = 147; Cash conversion cycle: 147 - 36 = 111

Therefore, the operating cycle and cash conversion cycle are both longer for the company than the industry.

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