2.3 OPERATING AND CASH CONVERSION CYCLES

Question 1

What do the operating cycle and cash conversion cycle measure?

Answer 1

They measure how effectively a firm manages its working capital; shorter cycles indicate more efficient management.

Question 2

What does operating cycle mean ?

Answer 2

The operating cycle is the time between a company’s purchase of inventory and the collection of cash from selling that inventory.

Question 2

What is the formula of operating cycle ?

Answer 2

Inventory Conversion Period + Average Collection Period.

Question 2

What is the formula of Inventory Conversion Period ?

Answer 2

365*Inventory turnover ratio

Question 3

What is the formula of turnover ratio ?

Answer 3

Cost of goods sold * Inventory

Question 4

What is the formula of Average Collection Period?

Answer 4

[Account receivable * annual credit ] X 365

Question 4

What is the formula of Cash conversion cycle ?

Answer 4

Operating cycle - Account payable deferral period

Question 4

What is the formula of Account payable deferral period ?

Answer 4

365 * ( Costs of goods sold * Accounts payable )