CFA Practice Question

CFA Practice Question

A company has the following information for the years 2007 and 2008.

2007 | 2008
Sales: 1,000 | 2,300
COGS: 400 | 1,500
Average receivables: 150 | 370
Average Inventory: 200 | 220
Average trade payable: 150 | 240

From 2007 to 2008 which of the following is true?
A. Cash conversion cycle decreased, inventory turnover increased.
B. Cash conversion cycle increased, inventory turnover decreased.
C. Cash conversion cycle increased, inventory turnover increased.
Explanation: Cash conversion cycle 2007 = 365 x [(200/400) + (150/1000) - (150/400)] = 100.4 days
Cash conversion cycle 2008 = 365 x [(220/1500) + (370/2300) - (240/1500)] = 53.85 days
Inventory turnover 2007 = 400/200 = 2x
Inventory turnover 2008 = 1500/220 = 6.8x

User Contributed Comments 2

User Comment
daikokuyaramen Payables Turnover is supposed to be Purchases/Avg Payables. What's the deal with that? You can't just do Avg Payables/COGS.

For example: Suppose you started the year with 1000 inventory and then ended with 0 inventory but had 1000 COGS for the year. There would have been no use of payables at all for the year.

Is this question wrong or can someone clarify?
a3tester to calculate cash conversion cycle you should use payables conversion period, which is Avg. Accounts Payable/COGS x 365.

You are right about payable turnover but it's not needed here. The question is correct.
You need to log in first to add your comment.