Question

If a company's 'cash conversion cycle' is 45 days, it implies :

• A. the company requires 45 days to manufacture the goods.
• B. the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable is 45 days.
• C. the company pays the amount due to its creditors in 45 days.
• D. that the length of time between the manufacturing of goods and sale of goods is 45 days.

Hint:

$$\text{CCC} = \text{Days Inventory} + \text{Days Receivable} - \text{Days Payable}$$ A shorter cash conversion cycle is ideal, as it means the company can generate cash quickly and run its operations with less external working capital.

Answer 1

The Correct Option is B

Step 1: Defining the Cash Conversion Cycle (CCC):
The Cash Conversion Cycle (also known as the Net Operating Cycle) is a vital efficiency metric. It measures the total time, in days, that it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

Step 2: Analyzing the Mathematical Components of CCC:
The Cash Conversion Cycle tracks the movement of cash through three main operational phases:
Cash Conversion Cycle = Inventory Conversion Period + Debtors Conversion Period - Creditors Deferral Period
Where:

• Inventory Conversion Period (Days Inventory Outstanding): The average time required to convert raw materials into finished goods and sell them.
• Debtors Conversion Period (Days Sales Outstanding): The average time required to collect cash from customers after credit sales.
• Creditors Deferral Period (Days Payable Outstanding): The average time the company takes to pay its suppliers for raw material purchases.

Step 3: Evaluating the Options:
The cycle measures the net time between the initial cash outflow for inventory purchases and the final cash inflow from customer collections. This matches option (B).