Question

which of the following statements regarding cash conversion cycle are TRUE?

A. Cash conversion cycle depicts the amount of days it takes for the firm to receive cash from sales

B. Cash conversion cycle is calculated as follows: day sales outstanding + days payable outstanding - days inventory outstanding

C. Cash conversion cycle is a measure of liquidity risk

D. Cash conversion cycle measure the time it takes for the firm to exhaust its cash in its operations

Answer 1

Before coming to nay conclusion the first thing one should understand is what exactly cash conversion cycle means?

Cash Conversion Cycle:

It is a barometer or metric for a company which is used to calculate the time (in number of days) a company takes in order to convert it's inventory and other material into sales which would in turn makes sure flow of cash in the business or in short conversion of materials or inventories into cash flows resulting from sales.It differs from company to company as different business have different market and material effecting cash flow .Majorly three things that effect cash conversion cycle are:

1)Time taken to sell inventory

2)Time taken to collect receivables

3)payment of bills without any defaulter.

For the above question we can conclude that option A and option C are correct.

Option B is wrong as Cash Conversion Cycle is calculated as follows:

CCC = DIO+DSO-DPO

where as

CCC = cash conversion cycle

DIO = days of inventory outstanding

DSO = days of sales outstanding

DPO = Days payable outstanding

And option D is also incorrect as from above definition we can conclude that it's basically measure of cash flow from sales .It can be said as quantitative measure that helps in better evaluation of company's operation and management.