A firm with a operating cash conversion cycle of 200 days and an operating cash conversion cycle of 120 days has an average payment period of:
A)320
B)180
C)3
D)cannot be determined from this information

Question

Quizplus · Accepted Answer

The average payment period can be calculated by subtracting the average inventory period from the operating cycle and then subtracting the average receivable period.

Average payment period = Operating cycle - Average inventory period - Average receivable period

Given: 
Operating cycle = 200 days 
Cash conversion cycle = 120 days

We know that: 
Operating cycle = Cash conversion cycle + Average payment period 
120 + Average payment period = 200 
Average payment period = 80

Therefore, 
Average payment period = 200 - Inventory conversion period - Receivable conversion period 
80 = 200 - Inventory conversion period - 120 
Inventory conversion period = 0

This means that the firm has no inventory, so the average payment period = 200 - 0 - 120 = 80 days. However, this answer is not one of the options, so the closest option is B, which is 180 days.

A Firm with a Operating Cash Conversion Cycle of 200