A firm purchases raw materials on June 1st.It converts the raw materials into inventory by the last day of the month,June 30th.However,it pays for the materials on June 15th.On July 31st,it sells the finished goods inventory.Then the firm collects cash from the sale one month later on August 31st.If this sequence accurately represents the firm's average working capital cycle,what is the firm's cash conversion cycle in days?

Question

Quizplus · Accepted Answer

The cash conversion cycle is the time it takes for a firm to convert its cash into inventory, then into accounts receivable, and finally back into cash. In this case, the firm purchases raw materials on June 1st, converts them into inventory by June 30th, pays for the materials on June 15th, sells the finished goods inventory on July 31st, and collects cash from the sale on August 31st. Therefore, the cash conversion cycle is 77 days (June 1st to August 31st).

A Firm Purchases Raw Materials on June 1st