Question

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.

Answer 1

Answer: 130 days

Explanation:

The Cash Conversion Cycle is a measure that attempts to show how many days on average it takes a company to convert resources into cash.

It is calculated with the following formula,

= Days of Inventory Outstanding + Days of Sales Outstanding - Days of Payables Outstanding

Where,

Days of Inventory Outstanding is the amount of days it takes to convert inventory to sales

Days of Sales Outstanding is the amount of time it takes debtors to pay the company for goods they bought and,

Days of Payables Outstanding is the time it took the company to pay for the goods it bought

Plugging in the figures we have,

= 100 + 60 - 30

= 130 days

The firm's cash conversion cycle is 130 days.