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CODE 036 - FINANCIAL MANAGEMENT

FINAL LEARNING RESOURCES ASSESSMENTS

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Exercise 2 - Operating Cycle and Cash Conversion Cycle (not

graded)
 Submissions1

 Instructions

Submissions
Here are your latest answers:

Question 1
 It is the number of days inventory is held before it is sold and the number of days
accounts receivable are held before collection. It represents the total number of days
the firm has funds invested in working capital.
Response: Operating Cycle
Feedback: The operating cycle is the number of days inventory is held before it is sold
and the number of days accounts receivable are held before collection. It represents the
total number of days the firm has funds invested in working capital. 

The cash conversion cycle (also called cash flow cycle) is the operating cycle minus the
average age of accounts payable. The cash conversion cycle represents the number of
days from the time the firm pays for the inventory until it receives cash from the sale of
the inventory. 

The cash conversion cycle is one way of evaluating a company’s cash management.
Shortening the cash conversion cycle without affecting sales can add to the firm’s
profitability. 
A company wants to do what it can to decrease its cash conversion cycle. The cash
conversion cycle can be decreased either by collecting its receivables faster or by
delaying payment of its payables. We will look at the different ways of doing both of
these.
Correct answer: Operating Cycle
Score: 1 out of 1 Yes

Question 2
 Helena Furnishings wants to sharply reduce its cash conversion cycle. Which 
of the following steps would reduce its cash conversion cycle?
Response: The company reduces its DSO.
Feedback: Statement a is false. If inventory increases, and sales do not, more 
cash is being “tied up” in inventory so the cash conversion cycle is 
increased, not reduced. Statement b is true. If the company reduces its 
DSO, it is collecting its accounts receivables more efficiently, so it 
reduces the cash conversion cycle. Statement c is false. If the company 
pays its bills sooner, it uses its cash to pay off accounts payable, 
which increase its cash conversion cycle.
Correct answer: The company reduces its DSO.
Score: 1 out of 1 Yes

Question 3
 Ignoring cost and other effects on the firm, which of the following 
measures would tend to reduce the cash conversion cycle?
Response: Forgo discounts that are currently being taken.
Correct answer: Forgo discounts that are currently being taken.
Score: 1 out of 1 Yes
Question 4
 Which of the following actions are likely to reduce the length of a 
company’s cash conversion cycle?
Response: Adopting a new inventory system that reduces the inventory conversion
period.
Feedback: Statements a and b are correct; therefore, statement d is the 
appropriate choice. Delaying payments to suppliers increases the length 
of the cash conversion cycle.
Correct answer: Statements a and b are correct.
Score: 0 out of 1 No

Question 5
 Which of the following statements is most correct?
Response: The cash balances of most firms consist of transactions, compensating,
precautionary, and speculative balances. The total desired cash balance can be
determined by calculating the amount needed for each purpose and then summing
them together.
Correct answer: For some firms, holding highly liquid marketable securities is a
substitute for holding cash because the marketable securities accomplish the same
objective as cash.
Score: 0 out of 1 No

Question 6
 Which of the following statements is most correct?
Response: An aging schedule is used to determine what portion of customers pay cash
and what portion buy on credit.
Correct answer: The DSO of a firm with seasonal sales can vary. While the sales per
day figure is usually based on the total annual sales, the accounts receivable balance
will be high or low depending on the season.
Score: 0 out of 1 No

Question 7
 Which of the following statements is most correct?
Response: Statements a and c are correct.
Correct answer: If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its
aging schedule would probably show some past due accounts.
Score: 0 out of 1 No
Question 8
 If the average age of inventory is 90 days, the average age of accounts payable is 60
days, and the average age of accounts receivable is 65 days, the number of days in the
cash flow cycle is:
Response: 95 days
Feedback: The cash flow cycle (or cash conversion cycle) is calculated as days in
inventory + days in receivables – days in payables. Putting the information into this
formula we get 95 days (90 + 65 – 60).
Correct answer: 95 days
Score: 1 out of 1 Yes

Question 9
 If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days 
sales outstanding was equal to 35 days, what was its average amount of 
accounts receivable outstanding? (Assume a 365-day year.)
Response: $194,444
Feedback: Accounts receivables = DSO  Sales per day = 35($2,027,773/365) =
$194,444.
Correct answer: $194,444
Score: 1 out of 1 Yes

Question 10
 A firm has $5,000,000 of inventory on average and annual sales of 
$30,000,000. Assume there are 365 days per year. What is the firm’s 
inventory conversion period?
Response: 60.83 days
Feedback: Inventory conversion period =Inventory/(Sales/365) 
= 60.83 days.
Correct answer: 60.83 days
Score: 1 out of 1 Yes

Question 11
 Ammer Products has an average accounts payable balance of $850,000 and its 
annual cost of goods sold is $8,750,000. Assume there are 365 days per 
year. What is Ammer’s payables deferral period?
Response: 35.46 days
Feedback: Payables deferral period =Payables/ (Cost of goods sold/365) 

= 35.46 days.
Correct answer: 35.46 days
Score: 1 out of 1 Yes

Question 12
 Spartan Sporting Goods has $5 million in inventory and $2 million in
accounts receivable. Its average daily sales are $100,000. The company’s
payables deferral period (accounts payable divided by daily purchases) is
30 days. What is the length of the company’s cash conversion cycle?
Response: 40 days
Feedback: 

Correct answer: 40 days

Score: 1 out of 1 Yes

Question 13
 For the Cook County Company, the average age of accounts receivable is 60 
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 
the firm’s cash conversion cycle?
Response: 87 days
Correct answer: 87 days
Score: 1 out of 1 Yes

Question 14
 Bowa Construction’s days sales outstanding is 50 days (on a 365-day basis).
The company’s accounts receivable equal $100 million and its balance sheet
shows inventory equal to $125 million. What is the company’s inventory
turnover ratio?
Response: 7.25
Feedback: 

Correct answer: 5.84

Score: 0 out of 1 No

Question 15
 On average, a firm sells $2,000,000 in merchandise a month. It keeps 
inventory equal to one-half of its monthly sales on hand at all times. If 
the firm analyzes its accounts using a 365-day year, what is the firm’s 
inventory conversion period?
Response: 182.5 days
Correct answer: 15.2 days
Score: 0 out of 1 No

Question 16
 Porta Stadium Inc. has annual sales of $80,000,000 and keeps average
inventory of $20,000,000. On average, the firm has accounts receivable
of $16,000,000. The firm buys all raw materials on credit, its trade
credit terms are net 35 days, and it pays on time. The firm’s managers
are searching for ways to shorten the cash conversion cycle. If sales
can be maintained at existing levels but inventory can be lowered by
$4,000,000 and accounts receivable lowered by $2,000,000, what will be
the net change in the cash conversion cycle? Use a 365-day year. Round
to the closest whole day.

Response: -105 days

Feedback: 

Correct answer: -27 days

Score: 0 out of 1 No

Question 17
 Jordan Air Inc. has average inventory of $1,000,000. Its estimated
annual sales are $10 million and the firm estimates its receivables
conversion period to be twice as long as its inventory conversion period.
The firm pays its trade credit on time; its terms are net 30 days. The
firm wants to decrease its cash conversion cycle by 10 days. It believes
that it can reduce its average inventory to $863,000. Assume a 365-day
 year and that sales will not change. By how much must the firm also
reduce its accounts receivable to meet its goal of a 10-day reduction in
its cash conversion cycle?

Response: $ 101,900
Feedback: 

Correct answer: $ 136,986

Score: 0 out of 1 No
Assessment
 Type: Quiz
 Max score: 17
 Start: Jul 6
 Due: Jul 10

 No more submissions are allowed

Score
Your latest submission is used
76
 Category Progress

Grade 52.94117647058823

None 47.05882352941177

9/17 (53%)
Submission
Submitted: Jul 9, 6:08 pm
Time taken: 24 m, 1 s.
Attempts: 1
Max. attempts: 1
Allow late submissions: Yes
Comments
Submission 1 @ 6:08 pm Jul 9, 2020

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