A company has a cash conversion cycle of 70 days. If the companys payable turnover decreases from 11 to 10, and receivables day increases by 5, which of the following statements is correct? the companys cash coversion cycle will: a. dec by approx 8 days b. dec by approx 3 days c. inc by approx 3 days d inc by approx 2 days
d. cash conversion cycle = receivables days + inventory days - payables period payables period = 365 / payables turnover = 365 / 11 = 33.18 days = 365 / 10 = 36.5 days since payables period increases by 3.32 days, and receivables days increases by 5, cash conversion cycle increases by approx 2 days.
yup D… the trick is recognising that its the payables TURNOVER that changes, and the receivables DAYS…
you guys are right. D.
Anyone have a trick to remember the formula for cash conversion cycle and/or its underlying components?
3 parts Receivables Turnover Inventory Turnover Payables Turnover R + I - P = CC Cycle. So RIP and you have it. CP
“What you pay less what you’re owed.” RIP may be nice, but make sure you know the concept. A note on the conversion cycling. Make sure to convert each component to days first, then add an subtract. Turnover ratios cannot be added and subtracted and then converted to days.
I should have mentioned each of the turnover was Days. Receivables Turnover days + Inventory Turnover Days - Payables turnover Days. CP