Asked by Kerri Lynn Eklund on Jun 03, 2024
Verified
Which of the following represents the correct formula for calculating the cash conversion cycle?
A) Days' sales in inventory − Days' payable outstanding.
B) Days' sales in cost of goods sold + Days' sales in inventory − Days' payable outstanding.
C) Days' sales in accounts receivable + Days' sales in inventory − Days' payable outstanding.
D) Days' sales in cost of goods sold − Days' payable outstanding.
E) Days' sales in accounts receivable − Days' payable outstanding.
Cash Conversion Cycle
A metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
Days' Sales
A financial ratio that measures the average number of days it takes a company to convert its receivables into cash.
Payable Outstanding
The total amount of a company's obligations or debts that have not yet been paid to creditors, often referred to as accounts payable.
- Gain an understanding of and execute computations concerning the cash conversion cycle to evaluate a firm's proficiency in managing its working capital.
Verified Answer
TR
Tiara RandleJun 03, 2024
Final Answer :
C
Explanation :
The correct formula for calculating the cash conversion cycle is Days' sales in accounts receivable + Days' sales in inventory − Days' payable outstanding. This formula takes into account the amount of time it takes a company to collect on its accounts receivable, the amount of time it takes to sell inventory, and the amount of time the company takes to pay its bills. This calculation helps a company understand how long it has to wait to receive cash from its sales and how long it can delay paying its bills, which can help manage cash flow.
Learning Objectives
- Gain an understanding of and execute computations concerning the cash conversion cycle to evaluate a firm's proficiency in managing its working capital.