CFA Practice Question
Big Toys, Inc. has a 34-day inventory period and a 23-day receivables period. The company purchases toys, which it sells from The Toy Co., under a 45-day payment arrangement. The Toy Co. ______
A. receives payment for each shipment prior to Big Toys reselling the toys in the shipment.
B. can be assured that Big Toys will be able to convert its inventory into cash before having to pay for that inventory.
C. finances a portion of Big Toys' receivables period.
User Contributed Comments 8
| User | Comment |
|---|---|
| chamad | 45 days payable is bigger than 23 days receivables....it's not financing only a portion but the whole receivables!!! |
| malawyer | First, look at the company in question, which is the supplier (ToyCo) of Bigtoy. Second: A is wrong, because ToyCo receives the payment AFTER Bigtoy sold it further (45 days compared to 23 days). B is wrong, because it takes BigToy 57 days (34+23) before converting the delivery into cash compared to 45 days when the bill is paid. C is obvious wrong. D is correct, because it finances the portion of 11 days of receivables of Bigtoy (45-34= 11 days left). |
| StanleyMo | i guess should be 34+23-45 = net cash cycle ( positive cash cycle = finance the receivable period) |
| mishis | 34+23-45= 12 days , this is portion of days receivables needed to be finance. |
| Rubbish | nonono...its 11days. 45-34=11 out of the 23 receivable days, 11 of it is financed by the payables.12 days left unfinanced cuz by then u had already paid back the payables.. |
| bvides | ha.ha..ITs different companies..read carefully..Big Toys and The TOy CO. |
| dipu617 | Yeah.. its different companies and apparently all the people in the discussion are aware about this! |
| shahzeb | Why is A incorrect? Toy Co gets paid in 45 days Toys sit in inventory for 34 days and then are sold in another 23 days = (34+23 = 57) 57 > 45 .. meaning Toy Co gets cash before Big Toys is able to collect cash |