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Basic Question 7 of 12
A firm has average inventory of $1,250,000, an inventory period of 58 days, a receivables period of 32 days, and average payables of $810,000. What is its cash cycle?
B. 52 days
C. 58 days
A. 48 days
B. 52 days
C. 58 days
User Contributed Comments 15
| User | Comment |
|---|---|
| chamad | 365/x=58days------x=6.2931(Inventory turn over) cogs/averae inventory=inv turn over----- cogs = inv turn over * invent = 6.2931 * 1250000 = 7866379.31 |
| schidamb | HOw do you calculate Accounts payable period? |
| steved333 | 52.416 365/58= 6.2931 invto= cogs/avg inv 6.2931*1,250,000= cogs= 7,866,379.31 7866379.31/810,000=9.7116=payablesto 365/9.7116=37.58 58+32-37.58= 52.42 |
| johnowens | Payables Turnover = purchases/payables, why are you all using COGS as the numerator? COGS/Inv = 365/58 -> COGS = 6.293*Inv Purchases = COGS-Inv = 6.293*Inv - Inv = 5.293*Inv Payables Turnover = (5.293*1.25m)/810k = 8.16 days of payables = 365/8.16 = 44.685 cycle = 58 + 32 - 45 = 45 |
| jainsuga | Simpler way should be : Accounts Payable will be = (Avg. PayablesAvg. Inventory)* Inventory Period . As both are based on COGS, so, the ratio of Avg. Payables/Avg. Inventory will be same as Accounts Payable/ Inventory Period period. Acocunts Payable: ($810,000/$1,250,000)*58 = 37.58 |
| NavdeepS | John, I agree with your point that Payables turnover should have purchases as num. But I dont understand why are you assuming that Purchases= COGS - Inv. Shouldnt it Purchases=COGS + ( change in inventory) |
| IvanTG | I have calculated it the same way as jainsuga. Much easier... |
| shiva5555 | It is easier to just make it a ratio and you can get it without knowing any formulas. You know they have the same relationship to each other. (58/1,250,000)=(X/810,000) solve for x and that gives you the accounts payable period. Just simple logic no prior knowledge needed. |
| joywind | agree with the idea that Purchase doesn't equal to COGS unless specify that Inventory Beginning = Inventory Ending. |
| joywind | alright... I was wrong according to the notes... |
| johntan1979 | 52.93 without rounding |
| Shaan23 | Cause we're givin average inventory here --- I think its' alright to assume COGS = Purchases. It should be clearer though. |
| houstcarr | can't assume that COGS and purchases are the same thing. that would make the LIFO/FIFO discussion irrelevant |
| khalifa92 | YESSSS i bet there wont be stupid question like this in the exam |
| walterli | Assume total purchase is COGS.... then its ok |
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Tamara Schultz
Learning Outcome Statements
explain the cash conversion cycle and compare issuers' cash conversion cycles
CFA® 2024 Level I Curriculum, Volume 2, Module 4.