Question

Identify and explain 1) three current asset investment policies 2) three approaches of financing operating current asset investments?

What is Cash Conversion Cycle?

Answer 1

Three current asset investment policies

There are alternative current asset investment policies which are mentioned below:

• ·Relaxed Current Asset Investment Policy
• ·Moderate Current Asset Investment Policy
• ·Restricted Current Asset Investment Policy

Relaxed Current Asset Investment Policy:A policy under which relatively large amounts of cash, marketable securities, andinventories are carried and under which sales are stimulated by a liberal creditpolicy, resulting in a high level of receivables.

Moderate Current Asset Investment Policy:A policy that is between the relaxed and restricted policies.

Restricted Current Asset Investment Policy:A policy under which holdings of cash, securities, inventories, and receivables areminimized.

Three approaches of financing operating current asset investments

• Maturity Matching, or “Self-Liquidating,” Approach

·AGGRESSIVE APPROACH

·CONSERVATIVE APPROACH

What is Cash Conversion Cycle

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties.

The cash conversion cycle is calculated as:

CCC = DIO + DSO - DPO

where DIO = days inventory outstanding

DSO = days sales outstanding

DPO = days payable outstanding

The CCC is also referred to as the cash cycle