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.
A) 10
B) 70
C) 130
D) 190

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as the sum of the days inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO).

DIO: The raw materials were used in manufacturing a finished good sold on account 100 days after the raw materials were purchased. Therefore, DIO = 100.
DSO: The customer paid for the finished good 60 days later. Therefore, DSO = 60.
DPO: The raw materials were purchased on account and paid for within 30 days. Therefore, DPO = 30.

Cash conversion cycle = DIO + DSO - DPO
Cash conversion cycle = 100 + 60 - 30
Cash conversion cycle = 130 days.

Therefore, the best choice is C.

A Firm Purchased Raw Materials on Account and Paid for Them