Question

1. Define the following terms and list the equation for each.

   • Inventory conversion period –

   • Average collection period –

   • Payables deferral period –

   • Cash conversion cycle –

2. What should a firm’s goal be regarding the cash conversion cycle, holding other things constant? Explain your answer.

Answer 1

A. Inventory conversion period will mean a period within which the inventory is converted into sales so it is an overall time duration within which the inventory will be converted into sales

B. Average collection period will be reflecting the period within which the account receivables are collected from the debtors of the company send it will be reflecting the efficiency of the company in order to collect the cash quickly.

C. Payable different period will mean that period of the difference of the accounting tables and it will be helping the organisation in order to increase their cash conversion period

D. cash conversion cycle is a cycle within which various Assets of the company are converted into cash so it will reflect the efficiency of the company in order to realise the cash quickly and have a liquidity upon its hands.

2. Goal of the company regarding the cash conversion cycle would be to reduce the cash conversion cycle as much as it can because it will reflect the liquidity in the hands of the company because lower the cash conversion cycle it will mean that higher the company will be having the cash in its hands and higher the liquidity in hands of the company.