Tutorial 7

Chapter 15: Cash Conversion Cycle

The cash conversion cycle (CCC) is the length of time required for a company to convert cash
invested in its operations to cash received as a result of its operations.

• A firm’s operating cycle (OC) is the time from the beginning of the production process
to collection of cash from the sale of the finished product. It is measured by summing
the average age of inventory (AAI) and the average collection period (ACP).

OC = AAI + ACP

• The time it takes to pay the accounts payable, measured in days, is the average payment
period (APP). The operating cycle less the average payment period yields the cash
conversion cycle. The formula for the cash conversion cycle is:

CCC = OC – APP

CCC=Inventory Conversion period+ Receivables collection period-Payables Deferral Period

CCC= (Days per year/inventory turnover) +Days sales outstanding- Payables deferral period

Substituting for OC, we can see that the cash conversion cycle has three main components, as
shown in the following equation: (1) average age of the inventory, (2) average collection period,
and (3) average payment period.

CCC = AAI + ACP – APP

Questions:

1. A firm has an operating cycle of 120 days, an average collection period of 40

days, and an average payment period of 30 days. The firm's average age of
inventory is ________ days.
A) 80
B) 50
C) 90
D) 70
Answer: A

2. A firm has a cash conversion cycle of 80 days, an average collection period of 25

days, and an average age of inventory of 70 days. Its operating cycle is ________
days.
A) 95
B) 105
C) 60
D) 130
Answer: A

3. A firm has an average age of inventory of 60 days, an average collection period of

45 days, and an average payment period of 30 days. The firm's cash conversion
cycle is ________ days.
A) 15
B) 45
C) 75
D) 135
Answer: C

4. A firm has a cash conversion cycle of 120 days, an average collection period of
25 days, and an average payment period of 50 days. The firm's average age of
inventory is ________ days.
A) 45
B) 95
C) 125
D) 145
Answer: D

5. 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
Answer: C

6. A firm has an average age of inventory of 101 days, an average collection period
of 49 days, and an average payment period of 60 days. The firm's cash conversion
cycle is
A) 150 days.
B) 90 days.
C) 112 days.
D) 8 days.
Answer: B
 7. A firm has an average age of inventory of 20 days, an average collection period of
30 days, and an average payment period of 60 days. The firm's cash conversion
cycle is ________ days.
A) 70
B) 50
C) -10
D) 110
Answer: C
Topic: Cash Conversion Cycle
Question Status: Revised
AACSB Guidelines: Analytic skills
 8. A firm has a cash conversion cycle of 60 days and average collection period of 40
days. The firm's operating cycle is ________ days.
A) 20
B) 100
C) 50
D) cannot be determined
Answer: D
Topic: Operating Cycle
Question Status: Revised
AACSB Guidelines: Analytic skills

9. A firm has an average age of inventory of 101 days, an average collection period
of 49 days, and an average payment period of 60 days. The firm's inventory
turnover is ________.
A) 3.2
B) 4.0
C) 2.5
D) 3.6
Answer: D

10. Carroll & King Corporation has $5 million of inventory and $2 million of accounts
receivable. Its average daily sales are $120,000. The company’s payables deferral
period (accounts payable divided by daily purchases) is 30 days. What is C&K’s cash
conversion cycle?

a. 24

b. 26

c. 27

d. 28

e. 30
11. Westley Company’s average age of accounts receivable is 50 days, the average age of
accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a
365-day year, what is the length of its cash conversion cycle?

a. 66

b. 69

c. 73

d. 77

e. 81

12. Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000;
and its average accounts receivable is $16,000,000. The firm buys all raw
materials on terms of net 35 days, and it pays on time. The firm is searching for
ways to shorten the cash conversion cycle. If sales can be maintained at existing
levels while lowering inventory by $4,000,000 and accounts receivable by
$2,000,000, by how many days would the cash conversion cycle be changed?
Use a 365-day year.

a. -27.4

b. -28.7

c. -30.2

d. -31.7

e. -33.3
 Steps:

CCC1 CCC2
Inventory conversion period= 91.25 73
(Days per year)/
(Sales/Inventory)
Days receivables are 73 63.875
outstanding=
(receivables)/(Sales/365)
Payables deferral period 35 days 35 days
129.3 101.9
Then change in CCC= 101.9-129.3=-27.4

13. Carroll & King Corporation has $5 million of inventory and $2 million of
accounts receivable. Its average daily sales are $120,000. The company’s
payables deferral period (accounts payable divided by daily purchases) is 30 days.
What is C&K’s cash conversion cycle?

a. 24

b. 26

c. 27

d. 28

e. 30
 14. Margetis Inc. carries an average inventory of $1,000,000. Its annual sales are $10
million, and its receivables conversion period is twice as long as its inventory
conversion period. The firm buys on terms of net 30 days, and it pays on time.
Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a
365-day year. He believes he can reduce the average inventory to $863,000 with
no affect on sales. By how much must the firm also reduce its accounts
receivable to meet its goal of a 10-day reduction in the cash conversion cycle?

a. $0

b. $101,900

c. $136,986

d. $333,520

e. $1,000,000

Steps:

CCC= inventory conversion period+ days sales outstanding+ payables deferral period

Before reduction in CCC After reduction in CCC

Sales 10,000,000 10,000,000
Inventory 1,000,000 863,000
Receivables conversion =2*inventory conversion
period period
Payables deferral period 30 days 30 days
So CCC before reduction= (365)/(
10,000,000/1,000,000)+2*(365)/( 10,000,000/1,000,000)-30=79.5

Then:

days sales outstanding= (receivables)/(sales/365)=2* (365)/( 10,000,000/1,000,000)= 73

then receivables before the reduction= 2,000,000

CCC after reduction= 69.5

69.5= (365)/( 10,000,000/863,000)+ Receivables/(10,000,000/365)-30

Then receivables after reduction= 1,863,013.68

Then receivables should be reduced by 2,000,000-1,863,013.68=136,986.32