A firm purchased raw materials on account and paid for them within 30 days. The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased. The customer paid for the finished good 60 days later. The firm's cash conversion cycle is___________ days.

Question

Quizplus · Accepted Answer

The cash conversion cycle can be calculated as follows:

Inventory conversion period + Receivables conversion period - Payables deferral period

Inventory conversion period = (Average inventory / Cost of goods sold) x 365
Since we don't have the average inventory, we cannot calculate this.

Receivables conversion period = (Average accounts receivable / Credit sales per day)
Credit sales per day = Total credit sales / Number of days in the period
Credit sales per day = 0 (since we don't have any information about credit sales)
Therefore, the receivables conversion period is 0.

Payables deferral period = (Accounts payable / Cost of goods sold) x 365
Accounts payable = Cost of raw materials purchased on account
As the raw materials were paid for within 30 days, we can assume that the accounts payable deferral period is 30.

Therefore, the cash conversion cycle = 0 + 0 - 30 = -30
Since a negative cash conversion cycle doesn't make sense, we can assume that there is some missing information in the question, and the best answer would be the closest one, which is B (130).

A Firm Purchased Raw Materials on Account and Paid for Them